UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
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| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended June 30, 20162019
OR
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-34249
FARMER BROS. CO.
(Exact Name of Registrant as Specified in Its Charter)
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| Delaware | | 95-0725980 |
(State or other jurisdiction of Incorporation)incorporation or organization) | | (I.R.S. Employer Identification No.) |
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| 1912 Farmer Brothers Drive, Northlake, Texas 76262 |
| (Address of Principal Executive Offices; Zip Code) |
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| 888-998-2468 |
| (Registrant’s Telephone Number, Including Area Code) |
13601 North Freeway, Suite 200, Fort Worth, Texas 76177
(Address of Principal Executive Offices; Zip Code)
888-998-2468
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
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| Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
| Common Stock, $1.00 par value | FARM | The NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO þ
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
Indicate by check mark whether the registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer þ Non-accelerated filer ¨ Smaller reporting company ¨(Do not check if a smaller reporting company) |
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| Large accelerated filer | ¨ | | | Accelerated filer | | þ |
| Non-accelerated filer | ¨ | | | Smaller reporting company | | ¨ |
| | | | Emerging growth company | | ¨ |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the | | |
| Exchange Act. | ¨ | | | | | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨NO þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the closing price at which the Farmer Bros. Co. common stock was sold on December 31, 20152018 was $278.4 million.$247.4 million.
As of September 12, 20163, 2019 the registrant had 16,781,56117,092,634 shares outstanding of its common stock, par value $1.00 per share, which is the registrant’s only class of common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Specified portions of the registrant’s definitive proxy statement to be filed with the U.S. Securities and Exchange Commission (“SEC”) pursuant to Regulation 14A in connection with the registrant’s 20162019 Annual Meeting of Stockholders (the “Proxy Statement”) are incorporated by reference into Part III of this report. Such Proxy Statement will be filed with the SEC not later than 120 days after the conclusion of the registrant’s fiscal year ended June 30, 20162019.
TABLE OF CONTENTS
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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 | |
| PART II | | |
| 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 | |
| PART III | | |
| ITEM 10. | Directors, Executive Officers and Corporate Governance | |
| ITEM 11. | Executive Compensation | |
| ITEM 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
| ITEM 13. | Certain Relationships and Related Transactions, and Director Independence | |
| ITEM 14. | Principal Accountant Fees and Services | |
| PART IV | | |
| ITEM 15. | Exhibits, and Financial Statement Schedules | |
| ITEM 16. | Form 10-K Summary | |
| SIGNATURES | |
| INDEX OF CONSOLIDATED FINANCIAL STATEMENTS | |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report and other documents we file with the SEC contain forward-looking statements that are based on current expectations, estimates, forecasts and projections 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 business through meetings, webcasts, phone calls and 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. These 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 and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, implied or forecast by our forward-looking statements due in part to the risks, uncertainties and assumptions set forth below in Part I, Item 1A,1.A., Risk Factors of this report, as well as those discussed elsewhere in this report and other factors described from time to time in our filings with the SEC. Reference is made in particular toGiven these risks and uncertainties, you should not rely on forward-looking statements regarding construction, relocation to and operationas a prediction of our new Texas facility,actual results. Any or all of the timing and success of our relocation plan, product sales, expenses, earnings per share (EPS), and liquidity and capital resources. We intend these forward-looking statements contained in this Annual Report on Form 10-K and any other public statement made by us, including by our management, may turn out to speak only atbe incorrect. We are including this cautionary note to make applicable and take advantage of the datesafe harbor provisions of this report and do not undertakethe Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise theseany 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 I
Overview
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company,” “we,” “us,” “our” or “Farmer Bros.”), is a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products. We serve a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurant, department and convenience store chains, hotels, casinos, hospitals,healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand and consumer-branded coffee products.and tea products, and foodservice distributors. With a robust product line, including organic, Direct Trade, Direct Trade Verified Sustainable coffees or DTVSProject D.I.R.E.C.T.® and other sustainably-produced coffees, iced and hot teas, cappuccino, spices, and baking/biscuit mixes, among others, we offer a comprehensive approach to our customers by providing not only a breadth of high-quality products, but also value-addedvalue added services such as market insight, beverage planning, and equipment placement and service. We were founded in 1912, incorporated in California in 1923, and reincorporated in Delaware in 2004. We operate in one business segment.
Corporate Relocation
In an effort to makecompleted the Company more competitive and better positioned to capitalize on growth opportunities, in fiscal 2015 we began the processrelocation of relocating our corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California to a new facility housing these operations currently under construction in Northlake, Texas (the “New Facility”("Northlake facility").
Closure and Sale of the Torrance Facility
We began the process of closing our Torrance facility in the spring of 2015 in phases, as follows:
Manufacturing and Distribution. In the fourth quarter of fiscal 2015, we transitioned our coffee roasting, grinding and packaging functions from our Torrance, California production facility and consolidated them with our Houston, Texas and Portland, Oregon production facilities, and moved our Houston distribution operations to our Oklahoma City, Oklahoma distribution center.
Corporate Headquarters. During the first half of fiscal 2016, we transferred our primary administrative offices from Torrance to temporary leased offices2017. We operate in Fort Worth, Texas near the New Facility, including the transfer or new hire of approximately 140 employees.one business segment.
Sale of Spice Assets. In order to focus on our core product offerings, in the second quarter of fiscal 2016, we completed the sale of certain assets associated with our manufacture, processing and distribution of raw, processed and blended spices and certain other culinary products (collectively, the “Spice Assets”) to Harris Spice Company Inc. (“Harris”). We provided certain post-closing transition services to Harris which concluded during the fourth quarter of fiscal 2016. The sale of the Spice Assets does not represent a strategic shift for us and is not expected to have a material impact on our results of operations because we will continue to sell a complete portfolio of spice and other culinary products purchased from Harris under a supply agreement to our direct-store-delivery, or DSD, customers.
Sale of the Torrance Facility. In the fourth quarter of fiscal 2016, we entered into a purchase and sale agreement to sell the Torrance facility. Subsequent to the fiscal year end, the sale of the Torrance facility closed on July 15, 2016. We have agreed to lease back the Torrance facility on a triple net basis through October 31, 2016, subject to two one-month extensions, at our option. As of June 30, 2016, the Torrance facility continued to house certain administrative functions and serve as a distribution facility and branch warehouse pending transition of the remaining Torrance operations to our other facilities.
Construction of the New Facility
In the first quarter of fiscal 2016, we entered into a lease agreement, (as amended the "Lease Agreement"), for the New Facility to be constructed by the lessor, at its expense. The Lease Agreement included an option to purchase the New Facility at a purchase price based on a percentage of the total project cost as of the closing date. In the fourth quarter of
fiscal 2016, we exercised the purchase option to acquire the partially constructed New Facility with a targeted closing date in the first quarter of fiscal 2017. Construction of and relocation to the New Facility are expected to be completed in the third quarter of fiscal 2017.
Products
We are a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products manufactured under supply agreements, under our owned brands, as well as under private labels on behalf of certain customers. Our product categories consist of the following:
a robust line of roast and ground coffee, including organic, Direct Trade, DTVS | |
| • | a robust line of roast and ground coffee, including organic, Direct Trade, Project D.I.R.E.C.T.® and other sustainably-produced offerings; |
frozen liquid coffee;
flavored and unflavored iced and hot teas;
culinary products including gelatins and puddings, soup bases, dressings, gravy and sauce mixes, pancake and biscuit mixes, jellies and preserves, and coffee-related products such as coffee filters, sugar and creamers;
spices; and
other beverages including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee.
Our owned brand products are sold primarily into the foodservice channel. Our primary brands include Farmer Brothers™Brothers®, Artisan Collection by Farmer Brothers™, Superior®,Metropolitan™, China Mist® and Metropolitan™Boyds®. Our Artisan coffee products include Direct Trade, Project D.I.R.E.C.T.®, Fair Trade Certified™, Rainforest Alliance Certified™, organic and proprietary blends. In addition, we sell whole bean and roast and ground flavored and unflavored coffee products under the Un Momento®, Collaborative Coffee™Coffee®, Cain's™ and, McGarvey® and Boyds® brands and iced and hot teas under the China Mist® brand through foodservice distributorsat retail. Our roast and ground coffee products are primarily sold in traditional packaging, including bags and fractional packages, as well as single-serve packaging. Our tea products are sold in traditional tea bags and sachets, as well as single-serve tea pods and capsules. For a description of the amount of net sales attributed to each of our product categories in fiscal 2016, 20152019, 2018 and 2014,2017, see Management's Discussion and Analysis of Financial ConditionsCondition and Results of Operations—Results of Operationsincluded in Part II, Item 7 of this report.
Business Strategy
Overview
We develop great tasting products delivered with concierge service withare a coffee company designed to deliver the goalcoffee people want, the way they want it. We are focused on being a growing and profitable forward-thinking industry leader, championing coffee culture through understanding, leading, building and winning in the business of a positive impact on our customers and the planet.coffee. Through our sustainability, stewardship, environmental efforts, and leadership we are not only committed to serving the finest products available, considering the cost needs of the customer, but also insist on their sustainable cultivation, manufacture and distribution whenever possible.
In order to achieve our mission, we have had to grow existing capabilities and develop new ones over the years. More recently, we have undertaken initiatives such as, but not limited to, the following:
develop new products in response to demographic and other trends to better compete in areas such as premium coffeecoffees and tea;teas;
expand production line capacity at the Northlake facility to integrate acquired product volumes and to support top-line growth;
rethink aspects of our Company culture to improve productivity and employee engagement and to attract and retain talent;
embrace sustainability across our operations, in the quality of our products, as well as, how we treat our coffee growers; and
ensure our systems and processes provide the highest qualityhigh-quality products at a competitive cost, protection from cyber-risk,against cyber threats, and a safe environment for our employees and partners.
We differentiate ourselves in the marketplace through our product offerings and through our customer service model, with quality and sustainability as the underpinning, which includes:
a wide variety of coffee product offerings and packaging options across numerous brands and three quality tiers;tiers-value, premium and specialty;
consumer-branded coffee and tea products;
channel-based expertise;
beverage equipment placement and 24/7 service;
hassle-free inventory and product procurement management;
DSDDirect-store-delivery ("DSD") customer service;
merchandising support; and
product and menu insights.insights; and
a robust approach to social, environmental and economic sustainability throughout our business.
Our services provided to DSD customers are conducted primarily in person through Route Sales Representatives, or RSRs, who develop personal relationships with chefs, restaurant owners and food buyers at their delivery locations. We also provide comprehensive coffee programs to our national account customers, including private brand development, green coffee procurement, hedging, category management, sustainable sourcing and supply chain management.
We distribute our owned brands primarily through our DSD network, while continuing to support and grow our private label and other national account business. Although currently a small portion of our distribution, we also distribute directly to consumers through our website and sell certain products such as Un Momento®, Collaborative Coffee™, Cain's™ and McGarvey® at retail.
Strategic Initiatives
We are focused on the following strategies to capitalize on our state-of-the-art Northlake facility, reduce costs streamline our supply chain, improve the breadth of products and services we provide to our customers, and better position the Company for growth:
Build our Value Proposition with our Customers
Commercial Brewing Equipment Service. From installation, to attractpreventative maintenance, and timely repair execution, our customers count on us to meet their equipment needs. Our trained service technicians provide reliable, consistent service coverage across a wide geographic area giving us a competitive advantage. In fiscal 2019, we repurposed a fully dedicated equipment remanufacturing center in Oklahoma City enabling us to restore used equipment to like-new condition enabling us to better manage equipment costs for us and our customers. In addition, we are investing in systems and processes to enable a more efficient go-to-market in fiscal 2020.
Customer Fill Rates. Providing our customers the product they want, when they want it, is key to customer satisfaction and retention. We are investing in systems and processes to improve our fill rates, an example being the new customers:branch replenishment tool we are rolling out in fiscal 2020 to assist our field team in ordering the right inventory. We believe our stockkeeping unit ("SKU") optimization project will support higher fill rates, while delivering on-trend products our customers demand.
Customer Service. We have partnered with a leading contact/call center provider to enable us to manage our equipment service program. In fiscal 2020, we are planning expansion of this partnership to provide support to our DSD route business to enable quick resolution of issues and drive better visibility on customer inquiries. We believe this will enable better customer response and help us to improve customer retention.
Capitalize on State-of-the-Art Facility
New Facility Investment. In fiscal 2017, we completed construction of and relocation to our state-of-the-art Northlake facility. In fiscal 2018, we began a project to expand our production lines at the Northlake facility. We are focused on leveraging our investment in the Northlake facility to produce the highest quality coffee in response to the market shift to premium and specialty coffee, support the transition of acquired product volumes, and create opportunities for customer acquisition and sustainable long-term growth.
Safe Quality Food ("SQF") Certification. We are committed to the highest standards in food quality and safety. In fiscal 2018, the Northlake facility received SQF certification, joining our Portland and Houston SQF-certified facilities. SQF is a Global Food Safety Initiative-based system that strengthens our commitment to supply safe quality coffee products and comply with food safety legislation. Required by many of our national account customers, SQF certification at the Northlake facility marks an important step that will allow us the production platform to increase volume for national account customers as needed.
Reduce Costs to Compete More Effectively
Acquisition Integration. Through our recent acquisitions we have worked to reduce costs by integrating the acquired businesses into our existing corporate and operational structure. Eliminating redundant functions, merging delivery networks and combining production processing and facilities have resulted in added synergies and efficiencies compared to their pre-acquisition cost structures.
New Facility. In fiscal 2015, we commenced work on aWe undertook the relocation of our corporate relocation plan to replace our aging production facility inheadquarters, product development lab, and manufacturing and distribution operations from Torrance, California with a more efficient, state-of-the-art facility to be located in Northlake, Texas. We undertook this endeavor,Texas, in part, to pursue improved production efficiency to allow us to provide a more cost-competitive offering of high-quality products. We believe the expectedongoing improvements in production efficiency combined with the wind-down and sale of our Torrance facility, shouldwill allow us to operate at a lower cost, generally.generally over the long term.
Third-Party LogisticsDSD Restructuring Plan. . During the second halfAs a result of fiscal 2016,an ongoing operational review of various initiatives within our DSD selling organization, we replacedhave reorganized our DSD operations in an effort to streamline operations and improve selling effectiveness and financial results. We continue to analyze our sales organization and evaluate other potential restructuring opportunities in light of our strategic priorities.
Supply Chain.In recent years, we have undertaken efforts to streamline our supply chain, including replacing our long-haul fleet operations with third-party logistics ("3PL"(“3PL“). We expect that this transportation arrangement will reduce, resulting in a reduction in our fuel consumption and empty trailer miles, while improving our intermodal and trailer cube utilization.
Vendor Managed Inventory. During the second half of fiscal 2016, we entered into a vendor managed inventory arrangement with a third party. We anticipate that the use ofutilization; using vendor managed inventory arrangements will result in a reduction in raw material, finished goodsto reconfigure our packaging methodology and logistics costs, while improving packaging innovationreduce waste; and fulfillment.
Warehouse Management. Subsequent to the fiscal year end, we entered into an agreement with a third party to provideengaging third-party warehouse management services for our New Facility. We expectat the warehouse management servicesNorthlake facility to facilitate cost savings by leveraging the third party's expertise in opening new facilities, implementing lean management practices, improving performance on certain key performance metrics, and standardizing best practices.
Optimize Sales, PricingTelematics. In an effort to make our DSD fleet more fuel-efficient, we installed telematics monitoring devices in our delivery trucks, allowing us to see contributing factors to our transportation-related carbon footprint. Installation of telematics monitoring devices has resulted in reduced idling time, a cut in rapid acceleration, and a reduction in fuel expenditures.
Portfolio of Products
Pricing and Products.Optimize Product Portfolio. InSince fiscal 2016,2018, we built capabilityhave undertaken efforts to more strategically optimize our pricing strategy across product, channel, customer and geographic segments. This process is designed to improve our average margins as well as retention rates. In addition, we continued our prior work optimizing SKU count and identifying opportunitiesreducing our total SKU count by more than 26.7%. We continue to consolidate suppliers to improve costs and supply chain efficiency.
DSD Reorganization. Duringevaluate the second half of fiscal 2016, we began to realign our DSD organization by undertaking initiatives intended to streamline communication and decision making, enhance branch organizational structure, and improve customer focus, including initiatives toward a comprehensive training program for all DSD team members to strengthen customer engagement.
Accelerate Customer Acquisition Efforts. In fiscal 2016, we executed a regional testproductivity of our first advertising and lead generation campaign designedproduct assortment in order to improveoptimize our new customer acquisition rate within our DSD network.portfolio.
Strategic Investment in Assets and Evaluation of Cost Structure
Market Opportunities. We believe we are well-positioned to continue to pursue growth through additional, opportunistic M&A activity to deliver aligned brands, customers and innovation. Our recent acquisitions have added to our product portfolio, improved our growth potential, deepened our distribution footprint and increased our capacity utilization at our production facilities.
Asset Utilization. We continue to look for ways to deploy our personnel, systems, assets and infrastructure to create or enhance stockholder value. Areas of focus have included corporate staffing and structure, methods of procurement, logistics, inventory management, supporting technology, and real estate assets.
Investment in Technology. We have invested in technology and process improvements to improve our efficiency and the effectiveness of our sales and distribution network. In recent years, we have completed our advanced routing software initiatives for our last mile delivery and we continue to invest in our hand-held sales and inventory management device for our delivery drivers.
Branch Consolidation and Property Sales. We evaluate our branch operation structure on an ongoing basis to identify opportunities to streamline the supply chain and reduce costs. In an effort to streamline our branch operations, in the fourth quarter oflast three fiscal 2016,years, we have sold two Northern California branch properties with a third Northernin Texas, Southern California, property under contract for sale,Washington and we acquired a new branch facility in Hayward, California.other states.
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• | Acquisitions. One of our investment priorities is exploring acquisitions that we believe will enhance long-term stockholder value and complement or enhance our product, equipment, service and/or distribution offerings to existing and new customer bases. For example, on September 9, 2016, through a newly-formed, wholly-owned subsidiary, we entered into an asset purchase agreement to acquire substantially all of the assets of China Mist Brands, Inc., dba China Mist Tea Company ("China Mist") for an aggregate purchase price of $11.3 million, with $10.8 million to be paid in cash at closing and $0.5 million to be paid as earnout if certain sales levels are achieved in the calendar years of 2017 and 2018. The transaction is expected to close during the second quarter of fiscal 2017. We anticipate that the acquisition of China Mist will give us a greater presence in the high-growth premium tea industry. See Note 24, Subsequent Events, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. |
Corporate Capabilities and Alignment to Create Stockholder Value
Investment in Human Resources. In fiscal 2016, we hired Isaac N. Johnston, Jr. as our Treasurer and Chief Financial Officer and Carolyn Suzanne Gargis as our VP of Human Relations. Each of these individualsOur senior leadership team brings a proven track record of strategic and operational leadership capabilities. We have also added experienced and vibrant talent to our team and continue to benefit from our in-house expertise in sustainability, acquisition and integration, and operations.
Commitment to Employee Wellness. We are committed to creating a healthier and happier workforce which we believe contributes to our success. We have received certifications as a Fit-Friendly Worksite and a Blue Zone Workplace based on the activities and environment created in our workplace to support healthy living and promote wellness of our associates.
Employee Development. We have invested in a Learning Management System to enable training facilitation and tracking of training modules to support the development of employees at both large consumer packaged goods operations as well as experienceall levels and functions within the organization. In recent years, we have deployed courses to our Quality, Manufacturing and Maintenance functions and we intend to expand our focus to include critical training modules that impact our entire workforce. We recently completed a Talent Planning Process of all exempt level employees across the organization. We calibrated the assessment of talent and created and began to execute on succession charts for all critical roles to ensure we have the right talent and capabilities to support the business today and in dealing with smaller and more entrepreneurial companies. the future.
Performance Driven Culture. In addition, in fiscal 2016,2019, we continued to emphasizepursue greater alignment of employee individual goals with Company goals under our compensation plans in order to focus the entire organization on the effort to create value for our stockholders.
Drive High-Growth Product CategoriesDevelopment Lab. The Northlake facility includes a product development lab where we are focused on developing innovative products in response to industry trends and Address Broader Customer Needscustomer needs. Recent new products developed includes Artisan and Metro Single Origin coffees, cold brew coffees, Artisan hot teas and on trend seasonal coffees and cappuccinos.
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• | Introduction of Collaborative Coffee™ and Redesign of Un Momento®Branded Retail Products. In an effort to address what we believe to be unmet consumer needs and improve margin within the retail grocery environment, in fiscal 2016 we launched the Collaborative Coffee™ brand into the retail grocery channel and completed a packaging redesign and product portfolio optimization of our Un Momento® retail branded product line. Collaborative Coffee™ offers coffee enthusiasts a super-premium, verified direct trade coffee at an approachable price. Un Momento® delivers Millennial Hispanic consumers appealing flavor variety and premium coffee at an exceptional value.
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Expand Sustainability Leadership
Sustainability. We believe that our collective efforts in measuring our social and environmental impact, creating programs for waste, water and energy reduction, promoting partnerships in our supply chain that aim at supply chain stability and food security, and focusing on employee engagement place us in a unique position to help retailers and foodservice operators create differentiated coffee and tea programs that can include sustainable supply chains, direct trade purchasing, training and technical assistance, recycling and composting networks, and packaging material reductions. During fiscal 2016,2019, we submitted our second third-party verifiedmade the Carbon Disclosure Project surveyProject's Climate leadership level for our efforts to reduce Scope 1, 2 and 3 emissions (direct emissions, indirect emissions from consumption of purchased electricity, heat or steam and other indirect emissions). Further, in fiscal 2019, we published aour annual sustainability report based on the Global Reporting Initiative’s comprehensive compliance standard. In addition, China Mist is a member of the Ethical Tea Partnership (the “ETP”), a non-profit organization that works to improve the sustainability of the tea sector, the lives of tea workers and farmers, and the environment in which tea is produced. As a member of the ETP, China Mist sources all of its tea from tea plantations that are certified, monitored, and regularly audited by the ETP.
Science-Based Carbon Reduction Targets. We believe combating climate change is critical to the future of our company, the coffee industry, coffee growers and the world. In fiscal 2019 we re-set our science based carbon reduction targets to include the acquisitions of Boyd Coffee, China Mist, and West Coast Coffee. With this new baseline, we established more ambitious goals in line with efforts to limit global warming to 1.5°C. Setting approved targets places us among those responsible businesses that are making measurable contributions to incorporate sustainability within their business strategy.
Zero Waste to Landfill. Achieving zero waste in our production and distribution facilities is a significant step in reaching our overall sustainability goals. In fiscal 2019 we maintained our goal of 90% waste diversion for our primary production and distribution facilities. To accomplish this goal, we implemented ambitious recycling and composting guidelines across these facilities. The enhanced efforts resulted in an approximate 80% reduction from previous years, meeting the Zero Waste International Alliance requirements for diverting waste sent to landfills in these locations.
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| • | LEED®LEED® Certified Facilities. Our Portland production and distribution facility was one of the first in the Northwest to achieve LEED® Silver Certification. Our corporate offices in Northlake, Texas achieved LEED® Silver Certification. We anticipate that our corporate offices at the New Facility will also be LEED
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| • | Expansion ofProject D.I.R.E.C.T.® certified.Program. In fiscal 2019, we continued to grow our direct trade sourcing model, Project D.I.R.E.C.T. ®. Project D.I.R.E.C.T . ® is an impact-based product or raw material sourcing framework that utilizes data-based sustainability metrics to influence an inclusive, collaborative approach to sustainability along the supply chain. To evaluate whether coffee is Project D.I.R.E.C.T . ® , we follow an outcome-based evaluation framework. The result of this evaluation impacts where we invest our resources within our supply chain and has led to an increased level of transparency for us. Project D.I.R.E.C.T . ® represents a growing part of our coffee portfolio. |
Expansion of Direct Trade Verified Sustainable Program. In fiscal 2016, we completed our first third-party audit and verification of our DTVS program for sourcing green coffee. DTVS is an impact-based product or raw material sourcing framework that utilizes data-based sustainability metrics to influence an inclusive, collaborative approach to sustainability along the supply chain. To evaluate whether coffee is DTVS, we follow an outcome-based evaluation framework. The outcome of this evaluation weighs on where we invest our resources within our supply chain and has led to an increased level of transparency for us. DTVS represents a growing percentage of our coffee portfolio.
Green Coffee Traceability.We are committed to the inclusion of more sustainably-sourced coffees in our supply chain. Regulatory and reputational risks can increase when customers, roasters and suppliers cannot see back into their supply chain. To address these concerns, as well as to deepen our commitment to the longevity of the coffee industry, inwe track traceability levels from all green coffee suppliers on a per-contract basis. During fiscal 20162019, we began requiringestablished a system for coffee suppliers to provide information on a per contract basis. This helps us to bring
transparency to our immediatesupply chain, rank our suppliers, and also to identify opportunities to select trusted providers, cooperatives, mills, exporters, etc., when offering sustainable coffees to our customers.
Supplier Sustainability. We are committed to working with suppliers who share our social, environmental and economic sustainability goals. Regulatory and reputational risks can increase when suppliers are not held to the same strict standards to which we hold ourselves. To address this concern, we annually survey all green coffee suppliers along with our top suppliers of greenprocessed coffee and non-coffee products to enhanceassess their reportingsocial, environmental, and economic sustainability practices and alignment with the United Nations Global Compact, a United Nations initiative to encourage businesses worldwide to adopt sustainable and socially responsible policies, documenting 96% compliance with United Nations Global Compact practices from all respondents. In fiscal 2019 we adopted new Supplier Standards of traceability information on each lotEngagement. These Standards of coffee soldEngagement set minimum standards for Suppliers that are designed to us.provide Farmer Bros. visibility into all aspects of its supply chain and meets these objectives. These Standards of Engagement also serve as Supplier’s Certificate of Compliance, executed by the undersigned Supplier, representing Supplier's receipt and acknowledgment of the Standards of Engagement and agreement to comply with the same.
Charitable Activities
We view charitable involvement as a part of our corporate responsibility and sustainability model: Social, Environmental, and Economic Development, or SEED. We endorse and support communities where our customers, employees, businesses, and suppliers are located, and who have enthusiastically supported us over the past 100 years. Our objective is to provide support toward a mission of supply chain stability with a focus on food security.
Recipient organizations include those with strong local and regional networks that ensure that families have access to nutritious food. Donations may take the form of corporate cash contributions, product donations, employee volunteerism, and workplace giving (with or without matching contributions).
Recipient organizations include Feeding America, Mercy Corps, Ronald McDonald House, and local food banks.
We support industry organizations such as World Coffee Research, which commits to grow, protect, and enhance supplies of quality coffee while improving the livelihoods of the families who produce it, and the Specialty Coffee Association of America ("SCAA"(“SCA”) Sustainability Council and the Coalition for Coffee Communities, which are focused on sustainability in coffee growing regions.
Our employee-driven CAFÉ Crew organizes employee involvement at local charities and fund raisers, including running in the Chicago Marathon in support of Team Ronald McDonald House, riding in the Ride Against Hunger supported by Tarrant Area Food Bank, supporting delivery for Meals on Wheels, and hosting local food drives.drives and donation of Farmer Brothers products nearing the end of their shelf life to organizations related to Feeding America.
All of our usable and near expiring products or products with damaged packaging that can be donated are donated to Feeding America affiliated food banks nationwide, in an effort to fully eliminatekeep all edible food waste from the landfill.going to landfills.
Industry and Market Leadership
We have made the following investments in an effort to ensure we are well-positioned within the industry to take advantage of category trends, industry insights, and general coffee and tea knowledge to grow our business:
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| • | Coffee Industry Leadership. Through our dedication to the craft of sourcing, blending and roasting coffee, and our participation and/or leadership positions with the SCAA,SCA, National Coffee Association, Coalition for Coffee Communities, International Women's Coffee Alliance, International Foodservice Manufacturers Association, Pacific Coast Coffee Association, Roasters Guild and World Coffee Research, we work to help shape the future of the coffee industry. We believe that due to our commitment to the industry, large retail and foodservice operators are drawn to working with us. We were among the first coffee roasters in the nation to receive SCAASCA certification of a state-of-the-art coffee lab and operate Public Domain®, a specialty coffeehouse in Portland, Oregon. Upon completion, we plan to submitWe also received SCA certification for our product development lab at the New Facility for SCAA certification.Northlake facility. |
Market Insight and Consumer Research. We have developed a market insight capability internally that reinforces our business-to-business positioning as a thought leader in the coffee industry.and tea industries. We provide trend insights
that help our customers create winning products and integrated marketing strategies for their own coffee brands.
strategies. Within this, we are focused on understanding key demographic groups such as Millennials, and Hispanics, and other key demographic groups, as well as key channel trends.
Raw Materials and Supplies
Our primary raw material is green coffee, an exchange-traded agricultural commodity traded on the Commodities and Futures Exchange that is subject to price fluctuations. Over the past five years, the coffee “C” market near month price per pound ranged from approximately $1.02$0.96 to $2.90.$1.90. The coffee “C” market near month price as of June 30, 20162019 and 20152018 was $1.46$1.10 and $1.32$1.15 per pound, respectively. Our principal packaging materials include cartonboard, corrugated and plastic. We also use a significant amount of electricity, natural gas, and other energy sources to operate our production and distribution facilities.
We purchase green coffee beans from multiple coffee regions around the world. Although coffeeCoffee “C” market prices in fiscal 2016 were relatively low compared to2019 traded in a $0.35 cent range during the year, and averaged 22% below the historical levels, thereaverage for the past five years. There can be no assurance that green coffee prices will remain at these levels in the future. Some of the Arabica coffee beans we purchase do not trade directly on the commodity markets. Rather, we purchase these coffee beans on a negotiated basis from coffee brokers, exporters and growers, including Direct Trade DTVS and Fair Trade Certified™ sources and Rainforest Alliance Certified™ farms. Fair Trade Certified™ provides an assurance that farmer groups are receiving the Fair Trade minimum price and an additional premium for certified organic products through arrangements with cooperatives. Direct Trade and DTVS products provide similar assurance except that the arrangements are provided directly to farmersindividual coffee growers instead of throughto cooperatives, in an effortproviding these farmers with price premiums and dedicated technical assistance to promote investment in betterimprove farm conditions and moreincrease both quality and productivity of sustainable farming practices as well as to ensure a fairer price.coffee crops, at the individual farm level. Rainforest Alliance Certified™ coffee is grown using methods that help promote and preserve biodiversity, conserve scarce natural resources, and help farmers build sustainable lives. Our business model strives to reduce the impact of green coffee price fluctuations on our financial results and to protect and stabilize our margins, principally through customer arrangements and derivative instruments, as further explained in Note 76, Derivative Instruments, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Annual Report on Form 10‑K. Intellectual Property
We own a number of United States trademarks and service marks that have been registered with the United States Patent and Trademark Office. We also own other trademarks and service marks for which we have filed applications for U.S. registration. We have licenses to use certain trademarks outside of the United States and to certain product formulas, all subject to the terms of the agreements under which such licenses are granted. We believe our trademarks and service marks are integral to customer identification of our products. It is not possible to assess the impact of the loss of such identification. Depending on the jurisdiction, trademarks are generally valid as long as they are in use and/or their registrations are properly maintained and they have not been found to have become generic. Registrations of trademarks can also generally be renewed indefinitely as long as the trademarks are in use. In addition, we own numerous copyrights, registered and unregistered, registered domain names, and proprietary trade secrets, technology, know-how, processes and other proprietary rights that are not registered.
Seasonality
We experience some seasonal influences. The winter months arehistorically have generally thebeen our 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. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
Distribution
We operate production facilities in Northlake, Texas; Houston, Texas; Portland, OregonOregon; and Houston, Texas.Hillsboro, Oregon. Distribution takes place out of ourthe Northlake facility, the Portland facilityand Hillsboro facilities, as well as three separate distribution centers in Northlake, Illinois; Oklahoma City, Oklahoma; and Moonachie, New Jersey. As of June 30, 2016, the Torrance facility continued to house certain administrative functionsJersey; and serve as a distribution facility and branch warehouse pending transition of the remaining Torrance operations to our other facilities. Upon completion, the New Facility will serve as a production facility and distribution center for our products.Scottsdale, Arizona. Our products reach our customers primarily in twothe following ways: through our nationwide DSD network of 450380 delivery routes and 109104 branch warehouses as of June 30, 2016,2019, or direct-shipped via common carriers or third-party distributors.
DSD sales are primarily made “off-truck” to our customers at their places of business by our RSRs who generally are responsible for soliciting, selling and collecting from and otherwise maintaining our customer accounts. Our DSD business includes office coffee services whereby we provide office coffee products, including a variety of coffee brands and blends, brewing and beverage equipment, and foodservice supplies directly to offices.business. We operate a large fleet of trucks and other vehicles to distribute and deliver our products through our DSD network, and we rely on 3PL service providers for our long-haul distribution. We maintain inventory levels at each branch warehouse to promote minimal interruption in supply. We also sell coffee and tea products directly to consumers through our website.websites and sell certain products at retail and through foodservice distributors.
Customers
We serve a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurant, department and convenience store chains, hotels, casinos, hospitals,healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand and consumer-branded coffee products.and tea products, and foodservice distributors. Although no single customer accounted for 10% or more of our net sales in any of the last three fiscal years, we have severala number of large national account customers, the loss of or reduction in sales to one or more of which would beis likely to have a material adverse effect on our results of operations. During fiscal 2016,2019, our top five customers accounted for approximately 19%13.3% of our net sales and no one customer exceed 10% of our net sales.
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 littleless concern aboutfor service, while others find great value in the service programs we provide. We offer a full return policy to ensure satisfaction and extended terms for those customers who qualify. Historically, our product returns have not been significant.
Competition
The coffee industry is highly competitive, including with respect to price, product quality, service, convenience, technology and innovation, and competition could become increasingly more intense due to the relatively low barriers to entry. We face competition from many sources, including the institutional foodservice divisions of multi-national manufacturers of retail products many of which have greater financial and other resources than we do, such as The J.M. Smucker Company (Folgers Coffee), Dunkin' Brands Group, Inc., and The Kraft Heinz Company (Maxwell House Coffee) and Massimo Zanetti Beverage,, wholesale foodservice distributors such as Sysco Corporation and US Foods, regional institutionaland national coffee roasters such as S&D Coffee & Tea (Cott Corporation), Massimo Zanetti Beverage USA, Trilliant Food and BoydNutrition LLC, Gaviña & Sons, Inc., Royal Cup, Inc., Ronnoco Coffee, LLC, and Community Coffee Company, andL.L.C., specialty coffee suppliers such as Keurig Green Mountain, Inc., Rogers Family Company, Distant Lands Coffee, Mother Parkers Tea & Coffee Inc., Starbucks Corporation and Peet’s Coffee & Tea.Tea (JAB Holding Company), and retail brand beverage manufacturers such as Keurig Dr. Pepper Inc.. As many of our customers are small foodservice operators, we also compete with cash and carry and club stores (physical and on-line) such as Costco, Sam’s Club and Restaurant Depot and on-line retailers such as Amazon. We also face competition from growth in the single-serve, ready-to-drink coffee beverage and cold-brewed coffee channels, as well as competition from other beverages, such as soft drinks (including highly caffeinated energy drinks), juices, bottled water, teas and other beverages.
We believe our state-of-the-art production facility, longevity, product quality and offerings, national distribution and equipment service network, coffee industry and sustainability leadership, market insight, comprehensive approach to customer relationship management, and superior customer service are the major factors that differentiate us from our competitors. We compete well when these factors are valued by our customers, and we 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 existing credit facility. For a description of our liquidity and capital resources, see Results of Operations and Liquidity, Capital Resources and Financial Condition included in Part II, Item 7 of this report and Note 1817, Other Current Liabilities, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Annual Report on Form 10‑K. Our working capital needs are greater in the months leading up to our peak sales period during the winter months, which we typically finance with cash flows from operations. In anticipation of our peak sales period, we typically increase inventory in the first quarter of the fiscal year. We use various techniques including demand forecasting and planning to determine appropriate inventory levels for seasonal demand.
Regulatory Environment
The conduct of our businesses, including, among other things, the production, storage, distribution, sale, labeling, quality and safety of our products, and occupational safety and health practices, are subject to various laws and regulations administered by federal, state and local governmental agencies in the United States. Our facilities are subject to various laws and regulations regarding the release of material into the environment and the protection of the environment in other ways. We are not a party to any material legal proceedings arising under these regulations except as described in Note 22, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Annual Report on Form 10‑K. Employees
On June 30, 2016,2019, we employed 1,634approximately 1,521 employees, 508421 of whom are subject to collective bargaining agreements.agreements expiring on or before June 30, 2022.
Other
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. We have no material revenues from foreign operations or long-lived assets located in foreign countries.
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, through a link maintained on our website under the heading “Investor Relations—SEC Filings,” 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 SEC. In addition, these reports and the other documents we file with the SEC are available at a website maintained by the SEC at http://www.sec.gov. Copies of our Corporate Governance Guidelines, the Charters of the Audit, Compensation, and Nominating and Corporate Governance Committees of the Board of Directors, and our Code of Conduct and Ethics can also be found on our website.
You should carefully consider each of the following factors, as well as the other information in this report, in evaluating our business and 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 any of the following risks actually occurs, our business, financial condition and financial results of operations could be harmed. In that case, the trading price of our common stock could decline.
RelocationCompetition in the coffee industry and beverage category could impact our profitability or harm our competitive position.
The coffee industry is highly competitive, including with respect to price, product quality, service, convenience, technology and innovation, and competition could become increasingly more intense due to the New Facility may be unsuccessful or less successfulrelatively low barriers to entry. We face competition from many sources, including the institutional foodservice divisions of multi-national manufacturers of retail products many of which have greater financial and other resources than we presently anticipate, which may adversely affectdo, wholesale foodservice distributors, regional and national coffee roasters, specialty coffee suppliers, and retail brand beverage manufacturers. As many of our business, operating resultscustomers are small foodservice operators, we also compete with cash and financial condition.carry and club stores and on-line retailers.
We cannot guarantee that we will be successful in implementing the relocationconsider our roasting and blending methods essential to the New Facility in accordance withflavor and richness of our expectations, in a timely manner or at all, which may adversely impactcoffees and, therefore, essential to our business, operating results and financial condition. Relocation to the New Facility could disruptbrand. Because our supply chain and ongoing operations, which could adversely affect our ability to deliver products both on a timely basis and in accordance with customer requirements, the effect of which could delay revenues or result in lost business opportunities. Our existing production facilities in Portland and Houston have been operating at much higher utilization rates than they have historically pending completion of the New Facility. In the event of significant increases in demand that precede the completion of and relocation to the New Facility, we mayroasting methods cannot be required to increase staffing, including through temporary labor and overtime, use third-party manufacturers, lease additional production facilities, or some combination of those alternatives or others to satisfy demand. There can be no assurance thatpatented, we would be ableunable to identify appropriate third-party providers on a timely basis or at all.prevent competitors from copying these methods if such methods became known. In addition, our success depends, in large part, on our ability to attract and retain skilled people. Competition for the best people in many of our key positionscompetitors may be intense, and we may not be able to attractdevelop roasting or blending methods that are more advanced than our production methods, which may also harm our competitive position.
Increased competition in coffee or other beverage channels may have an adverse impact on sales of our products. If we do not succeed in differentiating ourselves through, among other things, our product and retain sufficiently skilled people at the New Facility. Costs associated with the exit fromservice offerings, or if we are not effective in setting proper pricing, then our Torrance facilitycompetitive position may be weakened and the constructionour sales and relocation to, and operation of, the New Facilityprofitability may exceed our expectations, which could interfere with our ability to achieve our business objectives or could cause us to incur indebtedness in amounts in excess of expectations. In addition, failure to satisfy the conditions of governmental incentives relating to the New Facility could result in higher than expected costs.be materially adversely affected.
Increases in the cost of green coffee could reduce our gross margin and profit.profit and may increase volatility in our results.
Our primary raw material is green coffee, an exchange-traded agricultural commodity traded on the Commodities and Futures Exchange that is subject to price fluctuations. Although coffee “C” market prices in fiscal 2016 were relatively low compared to historical levels, there can be no assurance thatThe supply of green coffee, prices will remain at these levels in the future. The supply and price of green coffeesimilar to any agricultural commodity, may be impacted by, among other things, climate change, weather, natural disasters, real or perceived supply shortages, crop disease (such as coffee rust) and pests, general increase in farm inputs and costs of production, an increase in green coffee purchased and sold on a negotiated basis rather than directly on commodity markets in response to higher production costs relative to “C” market prices, political and economic conditions or uncertainty, labor actions, foreign currency fluctuations, armed conflict in coffee producing nations, acts of terrorism, government actions and trade barriers, and the actions of producer organizations that have historically attempted to influence green coffee prices through agreements establishing export quotas or by restricting coffee supplies.
Speculative trading in coffee commodities can also influence coffee prices. Additionally, specialty green coffees tend to trade on a negotiated basis at a premium above the “C” market price which premium, depending on the supply and demand at the time of purchase, may be significant. Increases in the “C” market price may also impact our ability to enter into green coffee purchase commitments at a fixed price or at a price to be fixed whereby the price at which the base “C” market price will be fixed has not yet been established. There can be no assurance that our purchasing practices and hedging activities will mitigate future price risk. As a result, increases in the cost of green coffee could have an adverse impact on our profitability.
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.
Maintaining a steady supply of green coffee is essential to keeping inventory levels low while securing sufficient stock to meet customer needs. Some of the Arabica coffee beans we purchase do not trade directly on the commodity markets. Rather, we purchase these coffee beans on a negotiated basis from coffee brokers, exporters and growers. If any of these supply relationships deteriorate, we may be unable to procure a sufficient quantity of high‑quality coffee beans at prices acceptable to us or at all. Further, non-performance by suppliers could expose us to credit and supply risk under coffee purchase commitments for delivery in the future. In addition, the political situation in many of the Arabica coffee growing regions, including Africa, Indonesia, and Central and South America, can be unstable, and such instability could affect our
ability to purchase coffee from those regions. If green coffee beans from a region become unavailable or prohibitively expensive, we could be forced to use alternative coffee beans or discontinue certain blends, which could adversely impact our sales. A raw material shortage could result in a deterioration of our relationship with our customers, decreased revenues or could impair our ability to expand our business.
Changes in green coffee commodity prices may not be immediately reflected in our cost of goods sold and may increase volatility in our results.
We purchase over-the-counter coffeecoffee-related derivative instruments to enable us to lock in the price of green coffee commodity purchases on our behalf or at the direction of our customers under commodity-based pricing arrangements. Although we account for certain coffee-related derivative instruments as accounting hedges, the portion of open hedging contracts that are not 100% effective as cash flow hedges and those that are not designated as accounting hedges are marked to period-end market price and unrealized gains or losses based on whether the period-end market price was higher or lower than the price we locked-in are recognized in our financial results at the end of each reporting period. If the period-end green coffee commodity prices decline below our locked in price for these derivative instruments, we will be required to recognize the resulting losses in our results of operations. Further, changes in commodity prices and the number of coffee-related derivative instruments held could have a significant impact on cash deposit requirements under our broker and counterparty agreements. Such transactions could cause volatility in our results because the recognition of losses 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.
Our business and results of operations are highly dependent upon sales of roast and ground coffee products. Any decrease in the demand for coffee could materially adversely affect our business and financial results.
Sales of roast and ground coffee represented approximately 61%, 61% and 60% of our net sales in the fiscal years ended June 30, 2016, 2015 and 2014, respectively. Demand for our products is affected by, among other things, consumer tastes and preferences, global economic conditions, demographic trends and competing products. Any decrease in demand for our roast and ground coffee products would cause our sales and profitability to decline.
Price increases may not be sufficient to offset cost increases or may result in volume declines which could adversely impact our revenues and gross margin.
Customers generally pay for our products based either on an announced price schedule or under commodity-based pricing arrangements whereby the changes in green coffee commodity costs are passed through to the customer. The pricing schedule is generally subject to adjustment, either on contractual terms or in accordance with periodic product price adjustments, which may result in a lag in our ability to correlate the changes in our prices with fluctuations in the cost of raw materials and other inputs. Depending on contractual restrictions, we may be unable to pass some or all of these cost increases to our customers by increasing the selling pricesprice of our products. If we are not successful in increasing sellingunable to increase prices sufficiently to offset increased raw material and other input costs, including packaging, direct labor and other overhead, or if our sales volume decreases significantly as a result of price increases, our results of operations and financial condition may be adversely affected.affected
Although coffee “C” market prices in fiscal 2019 averaged 22% below the historical average for the past five years, there can be no assurance that green coffee prices will remain at these levels in the future. There can be no assurance that our purchasing practices and hedging activities will mitigate future price risk. As a result, increases in the cost of green coffee could have an adverse impact on our profitability.
We face exposure to other commodity cost fluctuations, which could impact our margins and profitability.
In addition to green coffee, we are exposed to cost fluctuations in other commodities under supply arrangements, including raw materials, tea, spices, and packaging materials such as cartonboard, corrugated and plastic. We are also exposed to flucutations in the cost of fuel. We purchase certain ingredients, finished goods and packaging materials under cost-plus supply arrangements whereby our costs may increase based on an increase in the underlying commodity price or changes in production costs. The cost of these commodities depend on various factors beyond our control, including economic and political conditions, foreign currency fluctuations, and global weather patterns. The changes in the prices we pay may take place on a monthly, quarterly or annual basis depending on the product and supplier. Unlike green coffee, we do not purchase any derivative instruments to hedge cost fluctuations in these other commodities. As a result, to the extent we are unable to pass along such costs to our customers through price increases, our margins and profitability will decrease.
Our efforts to secure an adequate supply of quality coffees and other raw materials may be unsuccessful and impact our ability to supply our customers or expose us to commodity price risk.
Maintaining a steady supply of green coffee is essential to keeping inventory levels low while securing sufficient stock to meet customer needs. We rely upon our ongoing relationships with our key suppliers to support our operations. Some of the Arabica coffee beans we purchase do not trade directly on the commodity markets. Rather, we purchase these coffee beans on a negotiated basis from coffee brokers, exporters and growers. If any of these supply relationships deteriorate or we are unable to renegotiate contracts with suppliers (with similar or more favorable terms) or find alternative sources for supply, we may be unable to procure a sufficient quantity of high-quality coffee beans and other raw materials at prices acceptable to us or at all which could negatively affect our results of operations. Further, non-performance by suppliers could expose us to supply risk under coffee purchase commitments for delivery in the future. In addition, the political situation in many of the Arabica coffee growing regions, including Africa, Indonesia, and Central and South America, can be unstable, and such instability could affect our ability to purchase coffee from those regions. If green coffee beans from a region become unavailable or prohibitively expensive, we could be forced to use alternative coffee beans or discontinue certain blends, which could adversely impact our sales. A raw material shortage could result in disruptions in our ability to deliver products to our customers, a deterioration of our relationship with our customers, decreased revenues or could impair our ability to expand our business.
Interruption or increased costs of our supply chain and sales network or Labor force, including a disruption in operations at any of our production and distribution facilities, could affect our ability to manufacture or distribute products and could adversely affect our business and sales.
Our sales and distribution network requires a large investment to maintain and operate, and we rely on a limited number of production and distribution facilities. We also operate a large fleet of trucks and other vehicles to distribute and deliver our products through our DSD network, and we rely on 3PL service providers for our long-haul distribution. Certain products are also distributed by third parties or direct shipped via common carrier. Many of these costs are beyond our control, and many are fixed rather than variable.
There are potential adverse effects of labor disputes with our own employees or by others who provide warehousing, transportation (lines, truck drivers, 3PL service providers) or cargo handling (longshoremen), both domestic and foreign, of our raw materials or other products. 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 or that we will not be subject to future union organizing activity. The terms and conditions of existing, renegotiated or new collective bargaining agreements could also increase our costs or otherwise affect our ability to fully implement future operational changes to enhance our efficiency or to adapt to changing business needs or strategy.
In addition, we use a significant amount of electricity, gasoline, diesel and oil, natural gas and other energy sources to operate our production and distribution facilities. An increase in the price, disruption of supply or shortage of fuel and other energy sources that may be caused by increased demand or by events such as natural disasters, power outages, or the like, could lead to higher electricity, transportation and other commodity costs, including the pass-through of such costs under our agreements with 3PL service providers and other suppliers, that could negatively impact our profitability.
A disruption in operations at any of these facilities or any other disruption in our supply chain or increase in prices relating to service by our 3PL service providers, common carriers or distributors, service technicians or vendor-managed inventory arrangements, or otherwise, whether as a result of casualty, natural disaster, power loss, telecommunications failure, terrorism, labor shortages, shipping costs, trade restrictions, contractual disputes, weather, environmental incident, interruptions in port operations or highway arteries, increased downtime due to certain aging production infrastructure, pandemic, strikes, work stoppages, the financial or operational instability of key suppliers, distributors and transportation providers, or other causes, could significantly impair our ability to operate our business, adversely affect our relationship with our customers, and impact our financial condition or results of operations.
We rely on co-packers to provide our supply of tea, spice, culinary and culinaryother products. Any failure by co-packers to fulfill their obligations or any termination or renegotiation of our co-pack agreements could adversely affect our results of operations.
We have a number of supply agreements with co-packers that require them to provide us with specific finished goods, including tea, spice and culinary products. For some of our products we essentially rely upon a single co-packer as our sole-source for the product. The failure for any reason of any such sole-source or other co-packer to fulfill its obligations under the applicable agreements with us, including the failure by our co-packers to comply with food safety, environmental, or other laws and regulations, or the termination or renegotiation of any such co-pack agreement could result in disruptions to our supply of finished goods, cause damage to our reputation and brands, and have an adverse effect on our results of operations. Additionally, our co-packers are subject to risk, including labor disputes, union organizing activities, financial liquidity, inclement weather, natural disasters, supply constraints, and general economic and political conditions that could limit their ability to timely provide us with acceptable products, which could disrupt our supply of finished goods, or require that we incur additional expense by providing financial accommodations to the co-packer or taking other steps to seek to minimize or avoid supply disruption, such as establishing a new co-pack arrangement with another provider. A new co-pack arrangement may not be available on terms as favorable to us as our existing co-pack arrangements, ifor at all.
Our restructuring activities may be unsuccessful or less successful than we anticipate, which may adversely affect our business, operating results and financial condition.
We have implemented, and may in the future implement, restructuring activities, such as the DSD Restructuring Plan and recent efficiency initiatives in an effort to achieve strategic objectives and improve financial results. We cannot guarantee that we will be successful in implementing these activities in a timely manner or at all, or that such efforts will advance our business strategy as expected or result in realizing the anticipated benefits. Costs associated with restructuring activities may be greater than anticipated which could cause us to incur indebtedness in amounts in excess of expectations. Execution of restructuring activities has required, and will continue to require a substantial amount of management time and operational resources, including implementation of administrative and operational changes necessary to achieve the anticipated benefits. These activities may have adverse effects on existing business relationships with suppliers and customers, and impact employee morale. Management continues to analyze the Company’s sales organization and evaluate other potential restructuring opportunities in light of the Company’s strategic priorities which could result in additional restructuring charges the amount of which could be material. If we are unable to realize the anticipated benefits from our restructuring activities, we could be cost disadvantaged in the marketplace, and our competitiveness and our profitability could decrease.
Customer quality control problems or food safety issues may adversely affect our brands thereby negatively impacting our sales or leading to potential product recalls or product liability claims.
Selling products for human consumption involves inherent legal risks. 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 products, we have no control over our products once they are purchased by our customers. Clean water is critical to the preparation of coffee, tea and other beverages. We have no ability to ensure that our customers use a clean water supply to prepare these beverages. Instances or reports of food safety issues involving our products, whether or not accurate, such as unclean water supply, food or beverage-borne illnesses, tampering, contamination, mislabeling, or other food or beverage safety issues, including due to the failure of our third-party co-packers to maintain the quality of our products and to comply with our product specifications, could damage the value of our brands, negatively impact sales of our products, and potentially lead to product recalls, production interruptions, product liability claims, litigation or damages. A significant product liability claim against us, whether or not successful, or a widespread product recall may reduce our sales and harm our business.
CompetitionGovernment regulations affecting the conduct of our business could increase our operating costs, reduce demand for our products or result in litigation.
The conduct of our business is subject to various laws and regulations including those relating to food safety, ingredients, manufacturing, processing, packaging, storage, marketing, advertising, labeling, quality and distribution of our products, import of raw materials, as well as environmental laws and those relating to privacy, worker health and workplace safety. These laws and regulations and interpretations thereof are subject to change as a result of political, economic or social events. In addition, our product advertising could make us the coffee industrytarget of claims relating to false or deceptive advertising under U.S. federal and beverage categorystate laws, including the consumer protection statutes of some states. Any new laws and regulations or changes in government policy, existing laws and regulations or the interpretations thereof could require us to change certain of our operational processes and procedures, or implement new ones, and may increase our operating and compliance costs, which could adversely affect our results of operations. In addition, modifications to international trade policy, or the imposition of increased or new tariffs, quotas or trade barriers on key commodities, could adversely impact our profitability.
The coffee industry is highly competitive,business and results of operations. In some cases, increased regulatory scrutiny could interrupt distribution of our products or force changes in our production processes or procedures (or force us to implement new processes or procedures). In addition, compliance with any new or more stringent laws or regulations, or stricter interpretations of existing laws, including with respectincreased government regulations to price, product quality, service, convenience and innovation, and competition could become increasingly more intense due to the relatively low barriers to entry. We face competition from many sources, including the institutional foodservice divisions of multi-national manufacturers of retail products many of which have greater financiallimit carbon dioxide and other resources than we do, wholesale foodservice distributors, regional institutional coffee roasters,greenhouse gas emissions, could require us to reduce emissions and specialty coffee suppliers. As manyto incur compliance costs which could affect our profitability or impede the production or distribution of our customers are small foodservice operators, we also compete with cash and carry and club stores and on-line retailers.products. If we do not succeed in differentiating ourselves through, among other things, our productfail to comply with applicable laws and service offerings, then our competitive positionregulations, we may be weakened and our sales and profitability may be materially adversely affected. If, duesubject to competitive pressurescivil remedies, including fines, injunctions, recalls or contractual restrictions, we are required to reduce prices to attract market share or we are unable to increase prices in response to commodity and other cost increases,seizures, as well as potential criminal sanctions, which could have a material adverse effect on our results of operations and adversely affect our reputation and brand image. In addition, claims or liabilities of this sort may not be covered by insurance or by any rights of indemnity or contribution that we may have against others.
We could face significant withdrawal liability if we withdraw from participation in the multiemployer pension plans in which we participate.
We participate in two multiemployer defined benefit pension plans and one 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. Our required contributions to these plans could increase due to a number of factors, including the funded status of the plans and the level of our ongoing participation in these plans. Our risk of such increased payments may be adversely affectedgreater if any of the participating employers in these underfunded plans withdraws from the plan due to insolvency and we are not able to increase sales volumescontribute an amount sufficient to offsetfund the margin declines. Increased competitionunfunded liabilities associated with its participants in the single-serve, ready-to-drink coffee beverageplan. In the event we withdraw from participation in one or more of these plans, we could be required to make an additional lump-sum contribution to the plan. Our withdrawal liability for any multiemployer pension plan would depend on the extent of the plan’s funding of vested benefits. The amount of any potential withdrawal liability could be material to our results of operations and cold-brewed coffee channels, as well as competition from other beverages, such as soft drinks (including highly caffeinated energy drinks), juices, bottled water, teascash flows.
Litigation pending against us could expose us to significant liabilities and damage our reputation.
We are currently party to various legal and other beverages,proceedings, and additional claims may alsoarise in the future. See Note 22, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K. Regardless of the merit of particular claims, litigation may be expensive, time-consuming, operationally disruptive and distracting to management, and could negatively affect our brand name and image and subject us to statutory penalties and costs of enforcement. We can provide no assurances as to the outcome of any litigation or the resolution of any other claims against us. An adverse outcome of any litigation or other claim could negatively affect our financial condition, results of operations and liquidity. We are self-insured and our reserves may not be sufficient to cover future claims.
We are self-insured for many risks up to varying 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 claims experience, future claims may exceed claims we have an adverse impact on salesincurred 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. A successful claim against us that is not
covered by insurance or is in excess of our coffee products.
We face exposure to other commodity cost fluctuations, whichreserves or available insurance limits could impact our margins and profitability.
In addition to green coffee, we are exposed to cost fluctuations in other commodities under supply arrangements, including tea, spices, and packaging materials such as cartonboard, corrugated and plastic. We purchase certain finished goods and packaging materials under cost-plus supply arrangements whereby our cost may increase based on an increase in the underlying commodity price. The cost of these commodities depend on various factors beyond our control, including economic and political conditions, foreign currency fluctuations, and global weather patterns. Unlike green coffee, we do not purchase any derivative instruments to hedge cost fluctuations in these other commodities. As a result, to the extent we are unable to pass along such costs to our customers through price increases, our margins and profitability will decrease.
Increase in the cost, disruption of supply or shortage of energy or fuel couldnegatively affect our profitability.
We operate a large fleetbusiness, financial condition and results of trucks and other vehicles to distribute and deliver our products, and we rely on 3PL service providers for our long-haul distribution. Certain products are also distributed by third parties or direct shipped via common carrier. In addition, we use a significant amount of electricity, natural gas and other energy sources to operate our production and distribution facilities. An increase in the price, disruption of supply or shortage of fuel and other energy sources that may be caused by increasing demand or by events such as natural disasters, power outages, or the like, could lead to higher electricity, transportation and other commodity costs, including the pass-through of such costs under our agreements with 3PL service providers and other suppliers, that could negatively impact our profitability.operations.
Loss of business from one or more of our large national account customers and efforts by these customers to improve their profitability could have a material adverse effect on our operations.
We have severala number of large national account customers, the loss of or reduction in sales to one or more of which is likely to have a material adverse effect on our results of operations. During fiscal 2019, our top five customers accounted for approximately 13% of our net sales. We generally do not have long-term contracts with the majority of our customers. Accordingly, the majority of our customers can stop purchasing our products at any time without penalty and are free to purchase products from our competitors. There can be no assurance that our customers will continue to purchase our products in the same mix or quantities or on the same terms as they have in the past. In addition, because of the competitive environment facing many of our customers theyand industry consolidation which has produced large customers with increased buying power and negotiating strength, our customers have increasingly sought to improve their profitability through pricing concessions and more favorable trade terms. To the extent we provide pricing concessions or favorable trade terms, our margins would be reduced. If we are unable to continue to offer terms that are acceptable to our customers, they may reduce purchases of our products which would adversely affect our financial performance. Requirements that may be imposed on us by our customers, such as sustainability, inventory management or product specification requirements, may have an adverse effect on our results of operations. Additionally, our customers may face financial difficulties, bankruptcy or other business disruptions that may impact their operations and their purchases from us and may affect their ability to pay us for products which could adversely affect our sales and profitability.
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.
Our ability to effectively manage our business, maintain financial accuracy and efficiency, comply with regulatory, financial reporting, legal and tax requirements, and coordinate the production, distribution and saleaccounts receivable represents a significant portion of our products depends significantly on the reliability, capacitycurrent assets and integrity of information technology systems on which we rely. We are also dependent on enterprise resource planning software for somea substantial portion of our information technology systems and support. The failure of these systemstrade accounts receivables relate principally to operate effectively and continuously, problems with transitioning to upgraded or replacement systems, including, without limitation, in connection with the relocation to the New Facility, flaws in third-party software, or a breach in security of these systems could result in delays in processing replenishment orders from our branch warehouses, an inability to record input costs or product sales accurately or at all, an impaired understanding of our operations and results, and reduced operational efficiency. Failure to effectively allocate and manage our resources to support our information technology infrastructure could result in transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of sensitive or confidential data through security breach or otherwise. Significant capital investments could be required to remediate any potential problems or to otherwise protect against security breaches or to address problems caused by breaches. In addition, if we are unable to prevent security breaches, we may experience a loss of critical data or suffer financial or reputational damage or penalties because of the unauthorized disclosure of confidential information belonging to us or to our customers or suppliers. Our insurance policies do not cover losses caused by security breaches.
Interruption of our supply chain, including a disruption in operations at any of our production and distribution facilities, could affect our ability to manufacture or distribute products and could adversely affect our business and sales.
We rely on a limited number of productioncustomers, increasing our exposure to bad debts and distribution facilities. A disruption in operations at any of these facilities or any other disruption in our supply chain relating to green coffee supply, service by our 3PL service providers or common carriers, supply of raw materials and finished goods under vendor-managed inventory arrangements, or otherwise, whether ascounter-party risk which could potentially have a result of casualty, natural disaster, power loss, telecommunications failure, terrorism, labor shortages, contractual disputes or other causes, could significantly impair our ability to operate our business and adversely affect our relationship with our customers. In such event, we may also be forced to contract with alternative, and possibly more expensive, suppliers or service providers, which would adversely affect our profitability. Additionally, the majority of our green coffee comes through the Ports of Houston and Seattle. Any interruption to port operations, highway arteries, gas mains or electrical service in the areas where we operate or obtain products or inventory could restrict our ability to manufacture and distribute our products for sale and would adversely impact our business.
Our failure to accurately forecast demand for our products or quickly respond to forecast changes could have anmaterial adverse effect on our sales.results of operations.
Based upon our forecasts of customer demand, we set target levels for the manufactureA significant portion of our productstrade accounts receivable are from five customers. The concentration of our accounts receivable across a limited number of parties subjects us to individual counter-party and forcredit risk as these parties may breach our agreement, claim that we have breached the purchaseagreement, become insolvent and/or declare bankruptcy, delaying or reducing our collection of green coffeereceivables or rendering collection impossible altogether. Certain of the parties use third-party distributors or do business through a network of affiliate entities which can make collection efforts more challenging and, at times, collections may be economically unfeasible. Adverse changes in advance of customer orders. Ifgeneral economic conditions and/or contraction in global credit markets could precipitate liquidity problems among our forecasts exceed demand, wedebtors. This could experience excess inventoryincrease our exposure to losses from bad debts and manufacturing capacity and/or price decreases or we could be required to write-down expired or obsolete inventory, which could adversely impact our financial performance. Alternatively, if demand for our products increases more than we currently forecast and we are unable to satisfy increases in demand through our current manufacturing capacity or appropriate third-party providers, or we are unable to obtain sufficient raw materials inventories under vendor-managed inventory arrangements, we may not be able to satisfy customer demand for our products which could have ana material adverse impacteffect on our salesbusiness, financial condition and reputation.results of operations.
We depend on the expertise of key personnel.personnel and have experienced significant turnover in our senior management. The unexpected loss of one or more of these key employees or difficulty recruiting and retaining qualified personnel could have a material adverse effect on our operations and competitive position.
Our success largely depends on the efforts and abilities of our executive officers and other key personnel. There is limitedIn the past several months, we have experienced significant turnover in our senior management depthranks, including our former CEO. The lack of management continuity could adversely affect our ability to successfully manage our business and execute our strategy, as well as result in certain keyoperational and administrative inefficiencies and added costs, and may make recruiting for future management positions throughout the Company.more difficult. We must continue to recruit, retain, motivate and motivatedevelop management and other employees sufficiently to maintain our current business and support our projected growth and strategic initiatives. The lossThis may require significant investments in training, coaching and other career development and retention activities. Activities related to identifying, recruiting, hiring and integrating qualified individuals require significant time and attention. We may also need to invest significant amounts of cash and equity to attract talented new employees, and we may never realize returns on these investments. Competition for talent is intense, and we might not be able to identify and hire the personnel we need to continue to evolve and grow our business. If we are not able to effectively retain and grow our talent, our ability to achieve our strategic objectives will be adversely affected, which may impact our financial condition and results of operations. Further, any unplanned turnover or failure to develop or implement an adequate succession plan for our senior management and other key employees, could adverselydeplete our institutional knowledge base, erode our competitive advantage, and negatively affect our operationsbusiness, financial condition and competitive position.results of operations. We do not maintain key person life insurance policies on any of our executive officers.
Investment in acquisitions could disrupt our ongoing business, not result in the anticipated benefits and present risks not originally contemplated.
We have invested and in the future may invest in acquisitions which may involve risks and uncertainties, including the risks involved with entering new product categories or geographic regions, the difficulty in integrating newly-acquired businesses or brands, contingent risks associated with the past operations of or other unanticipated problems arising in any acquired business, the challenges of achieving strategic objectives and other benefits expected from acquisitions, the diversion of our attention and resources from our operations and other initiatives, the potential impairment of acquired assets and liabilities, the performance of underlying products, capabilities or technologies, and the potential loss of key personnel and customers of the acquired businesses. Additionally, any such acquisitions may result in potentially dilutive issuances of our equity securities, the incurrence of additional debt, restructuring charges and the recognition of significant charges for depreciation and amortization related to intangible assets. There can be no assurance that any such acquisitions will be identified or that we will be able to consummate any such acquisitions on terms favorable to us or at all. If any such acquisitions are not successful, our business and results of operations could be adversely affected.
Volatility in the equity markets could reduce the value of our investment portfolio.
The value of our investment portfolio may be adversely affected by interest rate fluctuations, downgrades in credit ratings, illiquidity in the capital markets and other factors which may result in other than temporary declines in the value of our investments. Any of these events could cause us to record impairment charges with respect to our investment portfolio or to realize losses on the sale of investments. We have incurred operating losses in the past and if we incur operating losses in the future on a continual basis, a portion or all of this investment portfolio may be required to be liquidated to fund those losses.
Increased severe weather patterns may increase commodity costs, damage our facilities and 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 development of the coffee cherries. A large portion of the global coffee supply comes from Brazil and so the climate and growing conditions in that country carry heightened importance. Decreased agricultural productivity in certain regions as a result of changing weather patterns may affect the quality, limit the availability or increase the cost of key agricultural commodities, such as green coffee and tea, which are important ingredients for our products. We have experienced storm-related damages and disruptions to our operations in the recent past related to both winter storms as well as heavy rainfall and flooding. 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 and results of operations.
VolatilityInvestment in acquisitions could disrupt our ongoing business, not result in the equity markets or interest rate fluctuations could substantially increase our pension funding requirementsanticipated benefits and negatively impact our financial position.
At June 30, 2016, the projected benefit obligation under our single employer defined benefit pension plans exceeded the fair value of plan assets. The difference between the projected benefit obligation and the fair value of plan assets, or the funded status 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, mix of plan asset investments, investment returns and the market value of plan assets can affect the level of plan funding, cause volatility in the net periodic benefit cost, increase our future funding requirements and require payments to the Pension Benefit Guaranty Corporation.
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, the cost of our
long-haul distribution, and the cost of hiring, training and managing our sales force. Many of these costs are beyond our control, and many are fixed rather than variable. Some competitors use alternate methods of distribution that fix, control, reduce or eliminate many of the costs associated with our method of distribution.
We are self-insured and our reserves maypresent risks 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 claims 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.
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.
Employee strikes and other labor-related disruptions may adversely affect our operations.originally contemplated.
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 continueinvested and in the future may invest in acquisitions which may involve significant risks and uncertainties. The success of any such acquisitions will depend, in part, on our ability to realize all or that we will not be subject to future union organizing activity. There are potential adverse effectssome of labor disputesthe anticipated benefits from integrating the acquired businesses with our own employees or by others who provide warehousing, transportation (lines, truck drivers, 3PL service providers) or cargo handling (longshoremen), both domesticexisting businesses, and foreign,to achieve revenue and cost synergies. Additionally, any such acquisitions may result in potentially dilutive issuances of our raw materials or other products. Strikes or work stoppages or other business interruptions could occur if we are unableequity securities, the incurrence of additional debt, restructuring charges, impairment charges, contingent liabilities, amortization expenses related to renew collective bargaining agreements on satisfactory terms or enter into new agreements on satisfactory terms, which could impair manufacturingintangible assets, and distribution of our products or result in a loss of sales,increased operating expenses, which could adversely impact our business, financial condition or results of operations. The terms and conditions of existing, renegotiated or new collective bargaining agreements could also increase our costs or otherwise affect our ability to fully implement future operational changes to enhance our efficiency or to adapt to changing business needs or strategy.
We could face significant withdrawal liability if we withdraw from participation in the multiemployer pension plans in which we participate.
We participate in two multiemployer defined benefit pension plans and one 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 more of these plans, we could be required to make an additional lump-sum contribution to the plan. Our withdrawal liability for any multiemployer pension plan would depend on the extent of the plan’s funding of vested benefits. Future collective bargaining negotiations may result in our withdrawal 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.financial condition. There can be no assurance that any such acquisitions will be identified or that we will be able to consummate any such acquisitions on terms favorable to us or at all, or that the synergies from any such acquisitions will be achieved. If any such acquisitions are not successful, our business and results of operations could be adversely affected.
Restrictive covenantsAn increase in our debt leverage could adversely affect our liquidity and results of operations.
As of June 30, 2019 and 2018, we had outstanding borrowings under our credit facility of $92.0 million and $89.8 million, respectively, with excess availability of $55.7 million and $25.3 million, respectively. We may limitincur significant indebtedness in the future, including through additional borrowings under the credit facility, exercise of the accordion feature under the credit facility to increase the revolving commitment by up to an additional $75.0 million, through the issuance of debt securities, or otherwise.
Our present indebtedness and any future borrowings could have adverse consequences, including:
requiring a substantial portion of our cash flow from operations to make payments on our indebtedness;
reducing the cash flow available or limiting our ability to make investments or otherwise restrict our abilityborrow additional funds, to pay dividends, to fund capital expenditures and other corporate purposes and to pursue our business strategies.strategies;
Our credit facility contains various covenantslimiting our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate;
increasing our vulnerability to general adverse economic and industry conditions; and
placing us at a competitive disadvantage compared to our competitors that limit our ability to, among other things, make investments; incur additional indebtedness; create, incur, assumehave less debt.
To the extent we become more leveraged, we face an increased likelihood that one or permit any liens on our property; pay dividends under certain circumstances; and consolidate, merge, sell or otherwise disposemore of all or substantially all of our assets. the risks described above would materialize.
Our credit facility also contains financial covenants relating to the maintenance of a fixed chargemaximum total net leverage ratio and a minimum interest expense coverage ratio in certain circumstances.ratio. Our ability to meet those covenants may be affected by events beyond our control, and there can be no assurance that we will meet those covenants. The breach of any of these covenants could result in a default under the credit facility.
In addition, if we are unable to make payments as they come due or comply with the restrictions and covenants under the credit facility or any other agreements governing our indebtedness, there could be a default under the terms of such
Future impairment chargesagreements. In such event, or if we are otherwise in default under the credit facility or any such other agreements, the lenders could adversely affectterminate their commitments to lend and/or accelerate the loans and declare all amounts borrowed due and payable. Furthermore, our operating results.
We perform an asset impairment analysislenders under the credit facility could foreclose on an annual basis or whenevertheir security interests in our assets. If any of those events occur, thatour assets might not be sufficient to repay in full all of our outstanding indebtedness and we may indicate possible existence of impairment.be unable to find alternative financing on acceptable terms or at all. Failure to achievemaintain existing or secure new financing could have a material adverse effect on our forecasted operating results, due to weakness in the economic environment or other factors, and declines in our market capitalization, among other things, could result in impairment of our intangible assets and goodwill and adversely affect our operating results.
We rely on independent certification for a number of our coffee products. Loss of certification could harm our business.
A number of our Artisan coffee products are independently certified as “Rainforest Alliance,” “Organic” and “Fair Trade.” We must comply with the requirements of independent organizations and certification authorities in order to label our products as certified. The loss of any independent certifications could adversely affect our reputation and competitive position, which could harm our business.
Possible legislation or regulation intended to address concerns about climate change could adversely affect our results of operations, cash flowsliquidity and financial condition.position.
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) couldOur liquidity has been 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 emissionsaffected 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 reductionsoperating performance in greenhouse gas emissions could result in increased energy, transportation and raw material costsrecent periods and may require us to make additional investments in facilities and equipment.
Our operating results may have significant fluctuations from period to period which could have a negative effect on our stock price.
Our operating results may fluctuate from period to period as a result of a number of factors, including fluctuationsbe further materially adversely affected by constraints in the pricecapital and supply of green coffee, fluctuations in the selling prices ofcredit markets and limitations under our products, the success of our hedging strategy, competition, changes in consumer preferences, seasonality, our ability to retain and attract customers, our ability to manage inventory and fulfillment operations and maintain gross margin, and period and year-end LIFO inventory adjustments. Fluctuations in our operating results due to these factors or for any other reason could cause our stock price to decline. In addition, price and volume fluctuations in the stock market as a whole may affect the market price of our stock in ways that may be unrelated to our financial performance. 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.
If we experience a deterioration in operating performance, operating losses may recur and, as a result, could lead to increased leverage which may harm our financial condition and results of operations.financing arrangements.
We incurred an operating loss in fiscal 2012need sufficient sources of liquidity to fund our working capital requirements, service our outstanding indebtedness and a net loss in fiscal 2013 and 2012. Iffinance business opportunities. Without sufficient liquidity, we could be forced to curtail our current strategies are unsuccessful,operations, or we may not achieve the levelsbe able to pursue business opportunities. The principal sources of sales and earnings we expect. As a result, we could suffer additional losses in future yearsour liquidity are funds generated from operating activities, available cash, 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 credit facility.
Our ability to fund the In recent periods, significant acquisition costs, associatedlarge capital investments along with the New Facility, satisfyunderperformance of our lease obligations and make payments of principal and interest onbusiness has resulted in a decrease in funds from operating activities, which has weakened our indebtedness depends onliquidity position. Should our future performance. Should we experience a deterioration in operating performance continue to deteriorate, we will have less cash inflows from operations available to meet these obligations.our financial obligations or to fund our other liquidity needs. In addition, if such deterioration were to lead to the closure of leased facilities, we would need to fund the costs of terminating those leases. If we are unable to generate sufficient cash flows 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 restructure all or a portion of our indebtedness;
sell selected assets; and/or
reduce or delay planned capital or operating expenditures.expenditures, strategic acquisitions or investments.
Such measures might not be sufficient to enable us to satisfy our financial obligations.obligations or to fund our other liquidity needs, and could impede the implementation of our business strategy, prevent us from entering into transactions that would otherwise benefit our business and/or have a material adverse effect on our financial condition and results of operations. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms.
Customer quality control problemsterms or at all. Our ability to obtain additional financing or refinance our indebtedness would depend upon, among other things, our financial condition at the time, and the liquidity of the overall capital markets and the state of the economy. Furthermore, any refinancing of our existing debt could be at higher interest rates and may require compliance with more onerous covenants, which could further restrict our business operations. In addition, if our lenders experience difficulties that render them unable to fund future draws on the credit facility, we may not be able to access all or a portion of these funds, which could adversely affect our brands thereby negatively impactingability to operate our sales.
Our success depends onbusiness and pursue our business strategies. In addition, covenants in our debt agreements could restrict or delay our ability to provide customers with high-quality products and service. Although we take measuresrespond to ensure that we sell only fresh products, we have no control over our products once they are purchased by our customers. Accordingly, customers may prepare our products inconsistent with our standards,business opportunities, or store our products for longer periodsin the event of time, potentially affecting product quality. 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. 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 may harm our business and reduce our sales.
Coffee contains 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 or other negative publicity or litigation 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. In addition, we could be subject to litigation relating to the existence of such compounds in our coffee which could be costly and adversely affect our business.
Instances or reports linking us to food safety issues could harm our business and lead to potential product recalls or product liability claims.
Selling products for human consumption involves inherent legal risks. Instances or reports of food safety issues involving our products, whether or not accurate, such as unclean water supply, food-borne illnesses, food tampering, food contamination or mislabeling, could damage the value of our brands, negatively impact sales of our products, and potentially lead to product recalls, product liability claims, litigation or damages. 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 affecting the conduct of our business could increase our operating costs, reduce demand for our products or result in litigation.
The conduct of our business is subject to various 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, including the Food Safety Modernization Act of 2011 which requires, among other things, that food facilities conduct contamination hazard analyses, implement risk-based preventive controls and develop track-and-trace capabilities; 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. Any new laws and regulations or changes in existing laws and regulations or the interpretations thereof could require us to change certain of our operational processes and procedures, or implement new ones, and may increase our operating and compliance costs. If we failfailure to comply with applicable laws and
regulations, we may be subject to civil remedies, including fines, injunctions, recallssuch covenants, could result in an event of default, which if not cured or seizures, as well as potential criminal sanctions, whichwaived, could have a material adverse effect on ourus.
Our operating results of operations.
Significant additional labeling or warning requirements may increase our costs and adversely affect sales of the affected products.
Various jurisdictions may seekhave significant fluctuations from period to adopt significant additional product labeling (such as requiring labeling of products that contain genetically modified organisms) or warning requirements or limitationsperiod which could have a negative effect on the availabilitymarket price of our common stock.
Our operating results may fluctuate from period to period as a result of a number of factors, including variations in our operating performance or the performance of our competitors, changes in accounting principles, fluctuations in the price and supply of green coffee, fluctuations in the selling prices of our products, relating to the content or perceived adverse health consequences of certainsuccess of our products. If these types of requirements become applicable to onehedging strategy, research reports and changes in financial estimates by analysts about us, or morecompetitors or our industry, our inability or the inability of our major products, they may inhibit salescompetitors to meet analysts’ projections or guidance, strategic decisions by us or our competitors, such as acquisitions, capital investments or changes in business strategy, the depth and liquidity of such products. the market for our common stock, adverse outcomes of litigation, changes in or uncertainty about economic conditions, conditions or trends in our industry, geographies, or customers, activism by any large stockholder or group of stockholders, speculation by the investment community regarding our business, actual or anticipated growth rates relative to our competitors, terrorist acts, natural disasters, perceptions of the investment opportunity associated with our common stock relative to other investment alternatives, competition, changes in consumer preferences and market trends, seasonality, our ability to retain and attract customers, our ability to manage inventory and fulfillment operations and maintain gross margin, and other factors described elsewhere in this risk factors section. Fluctuations in our operating results due to these factors or for any other reason could cause the market price of our common stock to decline.
In addition, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market price of equity securities issued by many companies. In the past, some companies that have had volatile market prices for example, we aretheir securities have been subject to the California Safe Drinking Water and Toxic Enforcement Actclass action or derivative lawsuits. The filing 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. The Council for Education and Research on Toxics (“CERT”) has filed suit against a number of companies as defendants, including our subsidiary, Coffee Bean International, Inc., which sell coffee in California for allegedly failing to issue clear and reasonable warnings in accordance with Proposition 65 that the coffee they produce, distribute and sell contains acrylamide. 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 or remove acrylamide from finished products (which may be impossible). 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.
Litigation pendinglawsuit against us, could expose us to significant liabilities and damage our reputation.
We are currently party to various legal and other proceedings, and additional claims may arise in the future. See Note 22, Commitments and Contingencies,regardless of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. Regardless of the merit of particular claims, litigation may be expensive, time-consuming, operationally disruptive and distracting to management, and could negatively affect our brand name and image and subject us to statutory penalties and costs of enforcement. We can provide no assurances as to the outcome, of any litigation or the resolution of any other claims against us. An adverse outcome of any litigation or other claim could negatively affect our financial condition, results of operations or liquidity.Compliance with regulations affecting publicly traded companies has resulted in increased costs and may continue to result in increased costs in the future.
As a publicly traded company, we are subject to laws, accounting and reporting requirements, tax rules and other regulations and requirements, including those imposed by the SEC and NASDAQ. Our efforts to comply with these requirements and regulations have resulted in, and are likely to continue to result in, increased expenses and a diversion of substantial management time and attention from revenue-generating activities to compliance activities. Because these laws and regulations are subject to varying interpretations, their application in practice may evolve over time as new guidance becomes available. This evolution may result in continuing uncertainty regarding compliance matters and additional costs necessitated by ongoing revisions to our disclosure and governance practices. Failure to comply with such regulations could have a material adversenegative effect on our business, financial condition and stock price.results of operations, as it could result in substantial legal costs, a diversion of management’s attention and resources, and require us to make substantial payments to satisfy judgments or to settle litigation. 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.
Concentration of ownership among our principal stockholders may dissuade potential investors from purchasing our stock, may prevent new investors from influencing significant corporate decisions, may result in activist actions and may result in a lower trading price for our common stock than if ownership of our common stock was less concentrated.
As of September 12, 2016, members ofBased on statements and reports filed with the Farmer family or entities controlled by the Farmer family (including trusts) beneficially owned approximately 32.4% of our outstanding common stock, including members of the Farmer family or entities controlled by the Farmer family (including trusts) comprising a group for purposes of Section 13SEC pursuant to Sections 13(d) and 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) identified in, large stockholders beneficially own a Schedule 13D/A filed with the SEC on September 8, 2016.significant portion 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, activist campaigns, proxy contests, the amendment of our charter documents, 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. If these stockholders engage in activist actions, responding to these actions can disrupt operations, be costly and time-consuming, and divert board and management attention, which could have an adverse effect on our results of operations and financial condition. 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 Sales of sharescommon stock by existingsignificant stockholders could causehave a material adverse effect on the market price of our stock price to decline.
Allcommon stock. In addition, the transfer of ownership of a significant portion of our outstanding shares are eligible for sale inof common stock within a three-year period could adversely affect our ability to use our net operating loss (“NOL”) carry forwards to offset future taxable net income.
Our outstanding Series A Preferred Stock or future equity offerings could adversely affect 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 our long-term incentive 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 priceholders of our common stock in some circumstances.
As of June 30, 2019, we had 14,700 shares of Series A Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share (“Series A Preferred Stock”), outstanding. The Series A Preferred Stock could decline.adversely affect the holders of our common stock in certain circumstances. On an as converted basis, holders of Series A Preferred Stock are entitled to vote together with the holders of our common stock and are entitled to share in the dividends on common stock, when declared. The Series A Preferred Stock pays a dividend, when, as and if declared by our Board of Directors, of 3.5% APR of the stated value per share payable in four quarterly installments in arrears, and has an initial stated value of $1,000 per share, adjustable up or down by the amount of undeclared and unpaid dividends or subsequent payment of accumulated dividends thereon, respectively, and a conversion premium of 22.5%. We may mandatorily convert all of the Series A Preferred Stock one year from the date of issue. The holder may convert 20%, 30% and 50% of the Series A Preferred Stock at the end of the first, second and third year, respectively, from the date of issue. In the future, we may offer additional equity, equity-linked or debt securities, which may have rights, preferences or privileges senior to our common stock. As a result, our common stocholders may experience dilution. Any of the foregoing could have a material adverse effect on the holders of our common stock.
Anti-takeover provisions or stockholder dilution could make it more difficult for a third party to acquire us.
Our Board of Directors has the authority to issue up to 500,000 shares of 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. We currently have 479,000 authorized shares of preferred stock undesignated as to series, and we could cause shares currently designated as to series but not outstanding to become undesignated and available for issuance as a series of preferred stock to be designated in the future. 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 common 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.
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, 2019, the projected benefit obligation under our single employer defined benefit pension plans exceeded the fair value of plan assets. The difference between the projected benefit obligation and the fair value of plan assets, or the funded status 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, mix of plan asset investments, investment returns and the market value of plan assets can affect the level of plan funding, cause volatility in the net periodic benefit cost, increase our future funding requirements and require payments to the Pension Benefit Guaranty Corporation. In addition, facility closings may trigger cash payments or previously unrecognized obligations under our defined benefit pension plans, and the cost of such liabilities may be significant or may compromise our ability to close facilities or otherwise conduct cost reduction initiatives on time and within budget. A significant increase in future funding requirements could have a negative impact on our financial condition and results of operations.
We rely on information technology and are dependent on software in our operations. Any material failure, inadequacy, interruption or security failure of that technology could affect our ability to effectively operate our business.
Our ability to effectively manage our business, maintain information accuracy and efficiency, comply with regulatory, financial reporting, legal and tax requirements, and coordinate the production, distribution and sale of our products depends significantly on the reliability, capacity and integrity of information technology systems, software and networks. We are also dependent on enterprise resource planning software for some of our information technology systems and support. The failure of these systems to operate effectively and continuously for any reason could result in delays in processing replenishment orders from our branch warehouses, an inability to record input costs or product sales accurately or at all, an impaired understanding of our operations and results, an increase in operating expenses, reduced operational efficiency, loss of customers or other business disruptions, all of which could negatively affect our business and results of operations. To date, we have not experienced a material breach of cyber security, however our computer systems have been, and will likely continue to be, subjected to unauthorized access or phishing attempts, computer viruses, malware, ransomware or other malicious codes. These threats are constantly evolving and this increases the difficulty of timely detection and successful defense. As a result, security, backup, disaster recovery, administrative and technical controls, and incident response measures may not be adequate or implemented properly to prevent cyber-attacks or other security breaches to our systems. Failure to effectively allocate and manage our resources to build, sustain, protect and upgrade our information technology infrastructure could result in transaction errors, processing inefficiencies, the loss of customers, reputational damage, litigation, business disruptions, or the loss of sensitive or confidential data through security breach or otherwise. Significant capital investments could be required to remediate any potential problems or to otherwise protect against security breaches or to address problems caused by breaches. In addition, if our customers or suppliers experience a security breach or system failure, their businesses could be disrupted or negatively affected, which may result in a reduction in customer orders or disruption in our supply chain, which would adversely affect our results of operations.
Failure to prevent the unauthorized access, use, theft or destruction of personal, financial and other confidential information relating to our customers, suppliers, employees or our Company, could damage our business reputation, negatively affect our results of operations, and expose us to potential liability.
The protection of our customer, supplier, employee, and Company data and confidential information is critical. We are subject to new and changing privacy and information security laws and standards that may require significant investments in technology and new operational processes. The use of electronic payment methods and collection of other personal information exposes us to increased risk of privacy and/or security breaches. We rely on commercially available systems, software, tools, and monitoring to provide security for processing, transmitting, and storing personal information from individuals, including
our customers, suppliers and employees, and our security measures may not effectively prohibit others from obtaining improper access to such information. We rely on third party, cloud based technologies which results in third party access and storage of Company data and confidential information. Employees or third parties with whom we do business or to whom we outsource certain information technology or administrative services may attempt to circumvent security measures in order to misappropriate such information, and may purposefully or inadvertently cause a breach involving such information. If we experience a data security breach of any kind or fail to respond appropriately to such incidents, we may experience a loss of or damage to critical data, suffer financial or reputational damage or penalties, or face exposure to negative publicity, government investigations and proceedings, private consumer or securities litigation, liability or costly response measures. In addition, our reputation within the business community and with our customers and suppliers may be affected, which could result in our customers and suppliers ceasing to do business with us which could adversely affect our business and results of operations. Our insurance policies do not cover losses caused by security breaches.
Our ability to use our NOL carryforwards to offset future taxable net income may be subject to certain limitations.
At June 30, 2019, we had approximately $146.8 million in federal and $113.4 million in state NOL carryforwards that will begin to expire in the years ending June 30, 2030 and June 30, 2020, respectively. If an ownership change as defined in Section 382 of the Internal Revenue Code (the "Code") occurs with respect to our capital stock, our ability to use NOLs to offset taxable income would be subject to certain limitations. Generally, an ownership change occurs under Section 382 of the Code if certain persons or groups increase their aggregate ownership by more than 50 percentage points of our total capital stock over a rolling three-year period. If an ownership change occurs, our ability to use NOLs to reduce taxable net income is generally limited to an annual amount based on the fair market value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt interest rate. If an ownership change were to occur, use of our NOLs to reduce payments of federal taxable net income may be deferred to later years within the 20-year carryover period; however, if the carryover period for any loss year expires, the use of the remaining NOLs for the loss year will be prohibited. Future changes in our stock ownership, some of which may be outside of our control, could result in an ownership change under Section 382 of the Code. There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs, or other unforeseen reasons, our existing NOLs could expire, decrease in value or otherwise be unavailable to offset future income tax liabilities. As a result, we may be unable to realize a tax benefit from the use of our NOLs, even if we generate a sufficient level of taxable net income prior to the expiration of the NOL carry forward periods.
Future impairment charges could adversely affect our operating results.
At June 30, 2019, we had $28.9 million in long-lived intangible assets, including recipes, non-compete agreements, customer relationships, trade names, trademarks and a brand name, and goodwill of $36.2 million, associated with completed acquisitions. Acquisitions are based on certain target analysis and due diligence procedures designed to achieve a desired return or strategic objective. These procedures often involve certain assumptions and judgment in determining the acquisition price. After consummation of an acquisition, unforeseen issues could arise that adversely affect anticipated returns or that are otherwise not recoverable as an adjustment to the purchase price. Even after careful integration efforts, actual operating results may vary significantly from initial estimates. We perform an asset impairment analysis on an annual basis or whenever events occur that may indicate possible existence of impairment. Failure to achieve forecasted operating results, due to weakness in the economic environment or other factors, changes in market conditions, loss of or significant decline in sales to customers included in valuation of the intangible asset, changes in our imputed cost of capital, and declines in our market capitalization, among other things, could result in impairment of our intangible assets and goodwill and adversely affect our operating results.
|
| |
| Item 1.B. | Unresolved Staff Comments |
None.
Our current production and distribution facilities are as follows: |
| | | | | | | |
| Location | | Approximate Area (Square FeetFeet) | | Purpose | | Status |
Northlake, TX(1)TX | | 538,000535,585 |
| | Under constructionCorporate headquarters, manufacturing, distribution, warehouse, product development lab | | LeasedOwned |
| Houston, TX | | 330,877 |
| | Manufacturing and warehouse | | Owned |
| Portland, OR | | 114,000 |
| | Manufacturing and distribution | | Leased |
| Northlake, IL | | 89,837 |
| | Distribution and warehouse | | Leased |
Oklahoma City, OK | | 142,115 |
| | Distribution and warehouse | | Owned |
Moonachie, NYNJ | | 41,404 |
| | Distribution and warehouse | | Leased |
Torrance, CA(2)Hillsboro, OR | | 665,00020,400 |
| | Manufacturing, distribution and warehouse | | Leased |
| Scottsdale, AZ | | 17,400 |
| | Distribution and warehouse | | Leased |
_____________
(1) Upon completion, the New Facility will house our manufacturing, distribution, product development lab and corporate headquarters. In the fourth quarter of fiscal 2016, we exercised the purchase option under the Lease Agreement to acquire the partially constructed New Facility with a targeted closing date in the first quarter of fiscal 2017. Construction of and relocation to the New Facility are expected to be completed in the third quarter of fiscal 2017. In the interim, we have leased 32,000 square feet of temporary office space in Fort Worth, Texas near the New Facility to house our primary administrative offices. See Note 4, New Facility Lease Obligation, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. | |
(2) | We sold the Torrance facility on July 15, 2016, subject to a lease back as described in Note 24, Subsequent Events, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. As of June 30, 2016, the Torrance facility continued to house certain administrative functions and serve as a distribution facility and a branch warehouse pending transition of the remaining Torrance operations to our other facilities. |
As of June 30, 2016,2019, we stage our products in 109104 branch warehouses throughout the contiguous United States. These branch warehouses and our 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 stand-alone branch warehouses vary in size from approximately 1,000 to 50,00034,000 square feet.
Approximately 52%53% of our facilities are leased with a variety of expiration dates within the range of 2020 through 2021.2028. The lease on the Portland facility was renewed in fiscal 2018 and expires in 2018 and has options2028, subject to an option to renew up to an additional 10 years.
We calculate our utilization for all of our productioncoffee roasting facilities on an aggregate basis based on the number of product pounds manufactured during the actual number of production shifts worked during an average week, compared to the number of product pounds that could be manufactured based on the maximum number of production shifts that could be operated during the week (assuming three shifts per day, sevenfive days per week), in each case, based on our current product mix. Utilization rates for our productioncoffee roasting facilities were approximately 90%71%, 66%75% and 65%93% during the fiscal years ended June 30, 2016, 20152019, 2018 and 2014,2017, respectively. The higher utilization rate in fiscal 2016 was primarily due to wind-down of production at our Torrance2019 includes the Northlake facility. The utilization rate in fiscal 2018 includes the Northlake facility and does not reflect the additionanticipated increase in capacity resulting from the production line expansion. The utilization rate in fiscal 2017 excludes the Northlake facility where we began roasting coffee in the fourth quarter of those production volumes to our Portland and Houston production facilities.fiscal 2017.
We believe that our Portland and Houston productionexisting facilities together with our existing distribution centers and branch warehouses, will provide adequate capacity for our current operations pending completion of the New Facility. In the event of significant increases in demand that precede the completion of and relocation to the New Facility, we may be required to increase staffing, including through temporary labor and overtime, use third-party manufacturers, lease additional production facilities or some combination of those alternatives or others to satisfy demand.operations.
.
For information regarding legal proceedings in which we are involved, see Note 22, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.
|
| |
| Item 4. | Mine Safety Disclosures |
Not applicable.
PART II
|
| |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
Our common stock trades on the NASDAQ Global Select Market under the symbol “FARM.” The following table sets forth the quarterly high and low sales prices of our common stock as reported by NASDAQ for each quarter during the last two fiscal years. |
| | | | | | | | | | | | | | | | |
| | | Year Ended June 30, 2016 | | Year Ended June 30, 2015 |
| | | High | | Low | | High | | Low |
| 1st Quarter | | $ | 28.16 |
| | $ | 20.90 |
| | $ | 29.10 |
| | $ | 20.29 |
|
| 2nd Quarter | | $ | 32.94 |
| | $ | 26.99 |
| | $ | 31.86 |
| | $ | 26.01 |
|
| 3rd Quarter | | $ | 31.63 |
| | $ | 24.04 |
| | $ | 32.50 |
| | $ | 22.72 |
|
| 4th Quarter | | $ | 32.50 |
| | $ | 26.69 |
| | $ | 25.96 |
| | $ | 23.39 |
|
On September 12, 2016, the last sale price reported on NASDAQ for our common stock was $33.46 per share.
Holders
As of September 12, 2016,3, 2019, there were approximately 2,250 holders of record. Determination of holders211 shareholders of record is based upon the number of record holders and individual participants in security position listings.common stock. This does not include persons whose common stock is in nominee or “street name” accounts through brokers.
Dividends
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, credit agreement restrictions, future prospects for earnings and cash flows, as well as other relevant factors. For a description of the credit agreement restrictions on the payment of dividends, see Liquidity, Capital Resources and Financial Condition included in Part II, Item 7 of this report, and Note 15, Bank Loan, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Equity Compensation Plan Information
Performance Graph
The following graph depicts a comparison of the total cumulative stockholder return on our common stock for each of the last five fiscal years relative to the performance of the Russell 2000 Index, the Value Line Food Processing Index and a peer group index. Companies in the Russell 2000, Value Line Food Processing Index and peer group index are weighted by market capitalization. The graph assumes an initial investment of $100.00 at the beginningclose of the five year periodtrading on June 30, 2014 and that all dividends paid by companies included in these indices have been reinvested.
Because no published peer group is similar to the Company's portfolio of business, the Company created a peer group index that includes the following companies: B&G Foods, Inc., Boulder Brands, Inc., Coffee Holding Co. Inc., Dunkin' Brands Group, Inc.,Lancaster Colony Corporation, National Beverage Corp., SpartanNash Company, InventureSeneca Foods Inc.Corp. and TreehouseTreeHouse Foods, Inc. The companies in the peer group index are in the same industry as Farmer Bros. Co. with product offerings that overlap with the Company's product offerings. Boulder Brands, Inc. is no longer a public company and has been excluded from the peer group index in fiscal 2016.
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. The Russell 2000 Index, the Value Line Food Processing Index and the peer group index are included for comparative purposes only. They do not necessarily reflect management's opinion that such indices are an appropriate measure for the relative performance of the stock involved, and they are not intended to forecast or be indicative of possible future performance of our common stock.
The material in this performance graph is not soliciting material, is not deemed filed with the SEC, and is not incorporated by reference in any filing of the Company under the Securities Act or the Exchange Act, whether made on, before or after the date of this filing and irrespective of any general incorporation language in such filing.
Comparison of Five-Year Cumulative
Total Return Performance Table
Farmer Bros. Co., Russell 2000 Index, Value Line Food Processing Index and Peer Group Index
(Performance Results Through June 30, 2016)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2011 |
| | 2012 |
| | 2013 |
| | 2014 |
| �� | 2015 |
| | 2016 |
|
| Farmer Bros. Co. | | $ | 100.00 |
| | $ | 78.50 |
| | $ | 138.66 |
| | $ | 213.12 |
| | $ | 231.76 |
| | $ | 316.17 |
|
| Russell 2000 Index | | $ | 100.00 |
| | $ | 97.92 |
| | $ | 121.63 |
| | $ | 150.38 |
| | $ | 160.61 |
| | $ | 150.70 |
|
| Value Line Food Processing Index | | $ | 100.00 |
| | $ | 108.65 |
| | $ | 130.34 |
| | $ | 159.51 |
| | $ | 170.55 |
| | $ | 202.07 |
|
| Peer Group Index | | $ | 100.00 |
| | $ | 119.31 |
| | $ | 144.21 |
| | $ | 160.87 |
| | $ | 175.66 |
| | $ | 215.12 |
|
Source: Value Line Publishing, LLC |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2014 |
| | 2015 |
| | 2016 |
| | 2017 |
| | 2018 |
| | 2019 |
|
| Farmer Bros. Co. | | $ | 100.00 |
| | $ | 108.75 |
| | $ | 148.36 |
| | $ | 139.98 |
| | $ | 141.37 |
| | $ | 75.75 |
|
| Russell 2000 Index | | $ | 100.00 |
| | $ | 106.80 |
| | $ | 100.21 |
| | $ | 127.11 |
| | $ | 149.36 |
| | $ | 144.42 |
|
| Value Line Food Processing Index | | $ | 100.00 |
| | $ | 106.92 |
| | $ | 126.68 |
| | $ | 135.00 |
| | $ | 134.16 |
| | $ | 144.79 |
|
| Peer Group Index | | $ | 100.00 |
| | $ | 104.70 |
| | $ | 158.44 |
| | $ | 151.90 |
| | $ | 143.89 |
| | $ | 110.69 |
|
Issuer Purchases of Equity Securities
The table below presents purchases made by or on behalf of the Company or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Exchange Act) of shares of our Class A Common Stock during each of the indicated periods.
|
| | | | | | | | | | | | | |
| Period | | Total Number of Shares of Our Class A Common Stock Purchased | | Average Price Paid Per Share of Our Class A Common Stock | | Total Number of Shares of Our Class A Common Stock Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares of Our Class A Common Stock That May Yet Be Purchased Under the Plan or Program |
| April 1 to April 30, 2019 | | — |
| | $ | — |
| | — |
| | — |
|
| May 1 to May 31, 2019 | | — |
| | $ | — |
| | — |
| | — |
|
| June 1 to June 30, 2019 | | — |
| | $ | — |
| | — |
| | — |
|
|
| |
| Item 6. | Selected Financial Data |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended June 30, |
| (In thousands, except per share data) | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| Consolidated Statement of Operations Data: | | | | | | | | | |
| Net sales | $ | 544,382 |
| | $ | 545,882 |
| | $ | 528,380 |
| | $ | 513,869 |
| | $ | 498,701 |
|
| Cost of goods sold | $ | 335,907 |
| | $ | 348,846 |
| | $ | 332,466 |
| | $ | 328,693 |
| | $ | 332,309 |
|
| Restructuring and other transition expenses(1) | $ | 16,533 |
| | $ | 10,432 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Net gains from sale of Spice Assets(2) | $ | (5,603 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Net (gains) losses from sales of assets | $ | (2,802 | ) | | $ | 394 |
| | $ | (3,814 | ) | | $ | (4,467 | ) | | $ | (268 | ) |
| Income (loss) from operations | $ | 8,179 |
| | $ | 3,284 |
| | $ | 8,916 |
| | $ | 372 |
| | $ | (21,846 | ) |
| Income (loss) from operations per common share—diluted | $ | 0.49 |
| | $ | 0.20 |
| | $ | 0.56 |
| | $ | 0.02 |
| | $ | (1.41 | ) |
| Income tax (benefit) expense(3) | $ | (79,997 | ) | | $ | 402 |
| | $ | 705 |
| | $ | (825 | ) | | $ | (347 | ) |
| Net income (loss)(4) | $ | 89,918 |
| | $ | 652 |
| | $ | 12,132 |
| | $ | (8,462 | ) | | $ | (26,576 | ) |
| Net income (loss) per common share—basic | $ | 5.45 |
| | $ | 0.04 |
| | $ | 0.76 |
| | $ | (0.54 | ) | | $ | (1.72 | ) |
| Net income (loss) per common share—diluted | $ | 5.41 |
| | $ | 0.04 |
| | $ | 0.76 |
| | $ | (0.54 | ) | | $ | (1.72 | ) |
| Cash dividends declared per common share | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | | |
| | June 30, |
| (In thousands) | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Total assets(5) | $ | 368,991 |
| | $ | 240,943 |
| | $ | 266,177 |
| | $ | 244,136 |
| | $ | 257,916 |
|
| Deferred income taxes | $ | 80,786 |
| | $ | 751 |
| | $ | 414 |
| | $ | 467 |
| | $ | 861 |
|
| Capital lease obligations(6) | $ | 2,359 |
| | $ | 5,848 |
| | $ | 9,703 |
| | $ | 12,168 |
| | $ | 15,867 |
|
| Long-term borrowings under revolving credit facility | $ | — |
| | $ | — |
| | $ | — |
| | $ | 10,000 |
| | $ | — |
|
| Earn-out payable-RLC acquisition(7) | $ | 100 |
| | $ | 200 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Long-term derivative liabilities | $ | — |
| | $ | 25 |
| | $ | — |
| | $ | 1,129 |
| | $ | — |
|
| Total liabilities(8) | $ | 186,397 |
| | $ | 150,932 |
| | $ | 151,313 |
| | $ | 162,298 |
| | $ | 174,364 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | For the Years Ended June 30, |
| (In thousands, except per share data) | 2019 | | 2018(1) | | 2017(1) | | 2016(1) | | 2015(1) |
| Consolidated Statement of Operations Data: | | | | | | | | | |
| Net sales | $ | 595,942 |
| | $ | 606,544 |
| | $ | 541,500 |
| | $ | 544,382 |
| | $ | 545,882 |
|
| Cost of goods sold | $ | 416,840 |
| | $ | 399,155 |
| | $ | 354,649 |
| | $ | 373,165 |
| | $ | 386,400 |
|
| Restructuring and other transition expenses | $ | 4,733 |
| | $ | 662 |
| | $ | 11,016 |
| | $ | 16,533 |
| | $ | 10,432 |
|
| Net gain from sale of Torrance Facility | $ | — |
| | $ | — |
| | $ | (37,449 | ) | | $ | — |
| | $ | — |
|
| Net gains from sale of Spice Assets | $ | (593 | ) | | $ | (770 | ) | | $ | (919 | ) | | $ | (5,603 | ) | | $ | — |
|
| Net (gains) losses from sales of other assets | $ | 1,058 |
| | $ | (196 | ) | | $ | (1,210 | ) | | $ | (2,802 | ) | | $ | 394 |
|
| Impairment losses on intangible assets | $ | — |
| | $ | 3,820 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| (Loss) income from operations | $ | (14,702 | ) | | $ | 1,053 |
| | $ | 38,934 |
| | $ | (1,736 | ) | | $ | (8,424 | ) |
| Pension settlement charge | $ | (10,948 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Income tax expense (benefit)(2) | $ | 40,111 |
| | $ | 17,312 |
| | $ | 14,815 |
| | $ | (72,239 | ) | | $ | 402 |
|
| Net (loss) income available to common stockholders | $ | (74,130 | ) | | $ | (18,669 | ) | | $ | 22,551 |
| | $ | 71,791 |
| | $ | (9,708 | ) |
| Net (loss) income available to common stockholders per common share—basic | $ | (4.36 | ) | | $ | (1.11 | ) | | $ | 1.35 |
| | $ | 4.35 |
| | $ | (0.60 | ) |
| Net (loss) income available to common stockholders per common share—diluted | $ | (4.36 | ) | | $ | (1.11 | ) | | $ | 1.34 |
| | $ | 4.32 |
| | $ | (0.60 | ) |
| Cash dividends declared per common share | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | As of June 30, |
| (In thousands) | 2019 | | 2018 | | 2017 | | 2016 | | 2015 |
| Consolidated Balance Sheet Data: | | | | | | | | | |
| Total current assets | $ | 159,908 |
| | $ | 173,514 |
| | $ | 140,703 |
| | $ | 177,366 |
| | $ | 166,140 |
|
| Property, plant and equipment, net | $ | 189,458 |
| | $ | 186,589 |
| | $ | 176,066 |
| | $ | 118,416 |
| | $ | 90,201 |
|
| Goodwill | $ | 36,224 |
| | $ | 36,224 |
| | $ | 10,996 |
| | $ | 272 |
| | $ | 272 |
|
| Intangible assets, net | $ | 28,878 |
| | $ | 31,515 |
| | $ | 18,618 |
| | $ | 6,219 |
| | $ | 6,419 |
|
| Deferred income taxes | $ | — |
| | $ | 39,308 |
| | $ | 53,933 |
| | $ | 71,508 |
| | $ | 11,770 |
|
| Total assets | $ | 424,610 |
| | $ | 475,531 |
| | $ | 407,153 |
| | $ | 383,714 |
| | $ | 282,417 |
|
| Short-term borrowings under revolving credit facility | $ | — |
| | $ | 89,787 |
| | $ | 27,621 |
| | $ | 109 |
| | $ | 78 |
|
| Long-term borrowings under revolving credit facility(3) | $ | 92,000 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Capital lease obligations | $ | 34 |
| | $ | 248 |
| | $ | 1,195 |
| | $ | 2,359 |
| | $ | 5,848 |
|
| Earnout payable | $ | 400 |
| | $ | 600 |
| | $ | 1,100 |
| | $ | 100 |
| | $ | 200 |
|
| Long-term derivative liabilities | $ | 1,612 |
| | $ | 386 |
| | $ | 380 |
| | $ | — |
| | $ | 25 |
|
| Total liabilities | $ | 267,116 |
| | $ | 246,476 |
| | $ | 177,601 |
| | $ | 186,397 |
| | $ | 161,951 |
|
(1) Prior year periods have been retrospectively adjusted to reflect the impact of certain changes in accounting principles to previously issued financial statements. See Note 32, Corporate Relocation Plan,Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Annual Report on Form 10‑K. (2) Includes valuation allowance of $50.1 million. See Note 5, Sale of Spice Assets, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. (3) Includes non-cash income tax benefit of $80.3 million in fiscal 2016 from the release of valuation allowance on deferred tax assets. See Note 2019, Income Taxes, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Annual Report on Form 10‑K.(4) Includes: (a) beneficial effect of liquidation of LIFO inventory quantities of $4.2 million, $4.9 million, $0, $1.1 million and $14.2 million(3) Classified as long-term in fiscal 2016, 2015, 2014, 2013 and 2012, respectively; and (b) $5.6 million in impairment losses on goodwill and intangible assets and $4.6 million in pension withdrawal expense in fiscal 2012.
(5) Includes $28.1 million in assets at June 30, 2016 recorded in "Property, plant and equipment" to offset New Facility lease obligation recorded in "Other long-term liabilities"related the New Facility included in "Property, plant and equipment" as the deemed owner of the New Facility.
(6) Excludes imputed interest.
(7)2019. See Note 214, AcquisitionRevolving Credit Facility, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.(8) Includes $28.1 million New Facility lease obligation at June 30, 2016 recorded in “Other long-term liabilities.”
See Note 19, Other Long-Term Liabilities, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Annual Report on Form 10‑K.
|
| |
| 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, 2016, 20152019, 2018 and 20142017 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.
OverviewOur Business
We are a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products manufactured under supply agreements, under our owned brands, as well as under private labels on behalf of certain customers. We were founded in 1912, incorporated in California in 1923, and reincorporated in Delaware in 2004. In fiscal 2017, we completed the relocation of our corporate headquarters from Torrance, California to Northlake, Texas. We operate in one business segment.
We serve a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurants, department and convenience store chains, hotels, casinos, hospitals,healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand and consumer-branded coffee products.and tea products, and foodservice distributors. We are a coffee company designed to deliver the coffee people want, the way they want it. We are focused on being a growing and profitable forward-thinking industry leader, championing coffee culture through understanding, leading, building and winning in the business of coffee. Through our sustainability, stewardship, environmental efforts, and leadership we are not only committed to serving the finest products available, considering the cost needs of the customer, but also insist on their sustainable cultivation, manufacture and distribution whenever possible.
Our product categories consist of a robust line of roast and ground coffee, including organic, Direct Trade, DTVSProject D.I.R.E.C.T. and other sustainably-produced offerings; frozen liquid coffee; flavored and unflavored iced and hot teas; culinary products including gelatins and puddings, soup bases, dressings, gravy and sauce mixes, pancake and biscuit mixes, jellies and preserves, and coffee-related products such as coffee filters, sugar and creamers; spices; and other beverages including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee. We offer a comprehensive approach to our customers by providing not only a breadth of high-quality products, but also value-addedvalue added services such as market insight, beverage planning, and equipment placement and service.
We operate production facilities in Northlake facility, Texas; Houston, Texas; Portland, OregonOregon; and Houston, Texas.Hillsboro, Oregon. Distribution takes place out of ourthe Northlake facility, the Portland facilityand Hillsboro facilities, as well as three separate distribution centers in Northlake, Illinois; Oklahoma City, Oklahoma; and Moonachie, New Jersey. As of June 30, 2016, the Torrance facility continued to house certain administrative functions, serve as a distribution facilityJersey; and branch warehouse pending transition of the remaining Torrance operations to our other facilities. Upon completion, the New Facility will serve as a production facility and distribution center for our products.
Scottsdale, Arizona. Our products reach our customers primarily in twothe following ways: through our nationwide DSD network of 450380 delivery routes and 109104 branch warehouses atas of June 30, 2016,2019, or direct-shipped via common carriers or third-party distributors. DSD sales are primarily made “off-truck” to our customers at their places of business. We operate a large fleet of trucks and other vehicles to distribute and deliver our products through our DSD network, and we rely on 3PL service providers for our long-haul distribution. DSD sales are made “off-truck” to our customers at their places of business.
Corporate Relocation
In an effort to make the Company more competitive and better positioned to capitalize on growth opportunities, in fiscal 2015 we began the process of relocating our corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California to a new facility housing these operations currently under construction in Northlake, Texas (the “Corporate Relocation Plan”). Approximately 350 positions were impacted as a result of the Torrance facility closure.
Summary Overview of Year Ended June 30, 2019 Results
In fiscal 2019, both our DSD and direct ship sales channels experienced sales declines. The DSD sales channel was impacted by higher customer attrition in part related to our route consolidation initiative and the integration process of the Boyd Business. Our direct ship sales channel also experienced headwinds, driven by softness from two large customers throughout the year and the volume production loss of two brands that we previously serviced to its owner, who now has in-house capabilities. We had also anticipated incremental sales volume in fiscal 2019 from a significant milestonesdirect ship customer that did not materialize. The production qualification requirements for this customer are still ongoing.
We experienced higher cost of goods sold in fiscal 2019 principally in the back half of the year. These costs included elevated inventory scrap expense, inventory markdowns, higher coffee brewing equipment and higher labor and manufacturing costs. The higher scrap expense and inventory markdowns was a byproduct of an inventory build put in place to reduce the disruption of product supply to our customers as we integrated the Boyd Business. While this inventory build helped mitigate supply disruptions, we were unable to sell the entire inventory, which generated increased scrap expense and inventory markdowns. Coffee brewing equipment and labor costs were higher in fiscal 2019 due to the completion of numerous large channel based customer installations. In addition, we had new business wins that required extra costs to support onboarding efforts. Finally, our manufacturing costs increased in fiscal 2019 due to the large number of customer product qualifications associated with the Boyd Business acquisition, elevated downtime from an aging infrastructure at our Houston plant, and higher production costs at our Northlake facility, which we were unable to fully absorb on the lower sales volume.
During the fourth quarter of fiscal 2019, under new leadership, the Company focused on six near-term operating priorities, which include: effective cash management, customer retention, efficiently managing coffee brewing equipment, enhancing processes and systems, rationalizing SKU counts, and optimizing our in-stock fill rate. These actions have enabled the Company to refocus on the fundamentals while addressing many of the challenges the business experienced in fiscal 2019.
Certain prior period amounts in the table below have been reclassified to conform to the current year presentation due to the adoption of new accounting standards.
Financial Data Highlights (in thousands, except per share data and percentages)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For The Years Ended June 30, | | 2019 vs 2018 | | 2018 vs 2017 |
| | 2019 | | 2018 | | 2017 | | Favorable (Unfavorable) | | Favorable (Unfavorable) |
| | | | | | | | Change | | % Change | | Change | | % Change |
| Income Statement Data: | | | | | | | | | | | | | |
| Net sales | $ | 595,942 |
| | $ | 606,544 |
| | $ | 541,500 |
| | $ | (10,602 | ) | | (1.7 | )% | | $ | 65,044 |
| | 12.0 | % |
| Gross margin | 30.1 | % | | 34.2 | % | | 34.5 | % | | (4.1 | )% | | NM |
| | (0.3 | )% | | NM |
|
| Operating expenses as a % of sales | 32.5 | % | | 34.0 | % | | 27.3 | % | | (1.5 | )% | | NM |
| | 6.7 | % | | NM |
|
| (Loss) income from operations | $ | (14,702 | ) | | $ | 1,053 |
| | $ | 38,934 |
| | $ | (15,755 | ) | | (1,496.2 | )% | | $ | (37,881 | ) | | NM |
|
| Net (loss) income | $ | (73,595 | ) | | $ | (18,280 | ) | | $ | 22,551 |
| | $ | (55,315 | ) | | (302.6 | )% | | $ | (40,831 | ) | | NM |
|
| Net (loss) income available to common stockholders per common share—basic | $ | (4.36 | ) | | $ | (1.11 | ) | | $ | 1.35 |
| | $ | (3.25 | ) | | NM |
| | $ | (2.46 | ) | | NM |
|
| Net (loss) income available to common stockholders per common share—diluted | $ | (4.36 | ) | | $ | (1.11 | ) | | $ | 1.34 |
| | $ | (3.25 | ) | | NM |
| | $ | (2.45 | ) | | NM |
|
| | | | | | | | | | | | | | |
| Operating Data: | | | | | | | | | | | | | |
| Coffee pounds | 108,098 |
| | 107,429 |
| 107,429 |
| 95,499 |
| | 669 |
| | 0.6 | % | | 11,930 |
| | 12.5 | % |
| EBITDA(1) | $ | 3,617 |
| | $ | 32,673 |
| | $ | 62,521 |
| | $ | (29,056 | ) | | (88.9 | )% | | (29,848 | ) | | (47.7 | )% |
| EBITDA Margin(1) | 0.6 | % | | 5.4 | % | | 11.5 | % | | (4.8 | )% | | NM |
| | (6.1 | )% | | NM |
|
| Adjusted EBITDA(1) | $ | 31,882 |
| | $ | 47,562 |
| | $ | 42,985 |
| | $ | (15,680 | ) | | (33.0 | )% | | $ | 4,577 |
| | 10.6 | % |
| Adjusted EBITDA Margin(1) | 5.3 | % | | 7.8 | % | | 7.9 | % | | (2.5 | )% | | NM |
| | (0.1 | )% | | NM |
|
| | | | | | | | | | | | | | |
| Percentage of Total Net Sales By Product Category | | | | | | | | | | | | | |
| Coffee (Roasted) | 63.5 | % | | 62.6 | % | | 62.7 | % | | 0.9 | % | | 1.4 | % | | (0.1 | )% | | (0.2 | )% |
| Coffee (Frozen Liquid) | 5.8 | % | | 5.7 | % | | 6.1 | % | | 0.1 | % | | 1.8 | % | | (0.4 | )% | | (6.6 | )% |
| Tea (Iced & Hot) | 5.6 | % | | 5.4 | % | | 5.4 | % | | 0.2 | % | | 3.7 | % | | — | % | | — | % |
| Culinary | 10.8 | % | | 10.6 | % | | 10.3 | % | | 0.2 | % | | 1.9 | % | | 0.3 | % | | 2.9 | % |
| Spice | 4.0 | % | | 4.2 | % | | 4.6 | % | | (0.2 | )% | | (4.8 | )% | | (0.4 | )% | | (8.7 | )% |
| Other beverages(2) | 9.8 | % | | 11.0 | % | | 10.4 | % | | (1.2 | )% | | (10.9 | )% | | 0.6 | % | | 5.8 | % |
| Net sales by product category | 99.5 | % | | 99.5 | % | | 99.5 | % | | — | % | | — | % | | — | % | | (6.8 | )% |
| Fuel Surcharge | 0.5 | % | | 0.5 | % | | 0.5 | % | | — | % | | — | % | | — | % | | — | % |
| Total | 100.0 | % | | 100.0 | % | | 100.0 | % | | — | % | | — | % | | — | % | | — | % |
| | | | | | | | | | | | | | |
| Other data: | | | | | | | | | | | | | |
| Capital expenditures related to maintenance | $ | 21,088 |
| | $ | 21,782 |
| | $ | 19,246 |
| | $ | (694 | ) | | (3.2 | )% | | $ | 2,536 |
| | 13.2 | % |
| Total capital expenditures | $ | 34,759 |
| | $ | 37,020 |
| | $ | 84,949 |
| | $ | (2,261 | ) | | (6.1 | )% | | $ | (47,929 | ) | | (56.4 | )% |
| Depreciation and amortization expense | $ | 31,065 |
| | $ | 30,464 |
| | $ | 22,970 |
| | $ | 601 |
| | 2.0 | % | | $ | 7,494 |
| | 32.6 | % |
| | | | | | | |
|
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|
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|
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|
|
________________
NM - Not Meaningful
(1) EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. See “Non-GAAP Financial Measures” below for a reconciliation of these non-GAAP measures to their corresponding GAAP measures. (2) Includes all beverages other than roasted coffee, frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee.
Recent Developments
Sale of Office Coffee Assets
In order to focus on our core product offerings, in July 2019, we completed the sale of certain assets associated with our
Corporate Relocation Planoffice coffee customers for $9.3 million in cash paid at the time of closing plus an earnout of up to an additional $2.3 million if revenue expectations are
as follows:achieved during test periods scheduled to occur at various branches at various times and concluding by early third quarter of fiscal 2020. |
| | |
Event | | Date |
Announced Corporate Relocation Plan | | Q3 fiscal 2015 |
Transitioned coffee processing and packaging from Torrance production facilitySale of Seattle Branch Property
On August 28, 2019, we completed the sale of our branch property in Seattle, Washington state for a gross sale price of $7.9 million. Sale leaseback of Houston Facility and consolidated them with Houston and Portland production facilities
| | Q4 fiscal 2015 |
Moved Houston distribution operations to Oklahoma City distribution center | | Q4 fiscal 2015 |
Entered into the lease agreement and development management agreement for New Facility | | Q1 fiscal 2016 |
Commenced construction of New Facility | | Q1 fiscal 2016 |
Transitioned primary administrative offices from Torrance to temporary leased offices in Fort Worth, Texas | | Q1-Q2 fiscal 2016 |
Sold Spice Assets to Harris | | Q2 fiscal 2016 |
Principal design work completed on New Facility | | Q3 fiscal 2016 |
Completed transition services to Harris and ceased spice processing and packaging at Torrance facility | | Q4 fiscal 2016 |
Entered into purchase and sale agreement to sell Torrance facility | | Q4 fiscal 2016 |
Exercised purchase option on New Facility | | Q4 fiscal 2016 |
Closed sale of Torrance facility | | Q1 fiscal 2017 |
Close on purchase option for New Facility | | Estimated Q1 fiscal 2017 |
Exit from Torrance facility | | Estimated Q2 fiscal 2017 |
Completion of construction and relocation to New Facility | | Estimated Q3 fiscal 2017 |
Recent Developments
On September 9, 2016,6, 2019, we entered into an assetsigned a purchase and sale agreement to acquire substantially all(the “PSA”) for the sale of the assets of China Mist Brands, Inc.,our Houston, Texas manufacturing facility and warehouse (the “Property”) for an aggregate purchase price, exclusive of $11.3 million,closing costs, of $10.0 million. Pursuant to the PSA and upon the closing of the sale of the Property, we and the purchaser have agreed to enter into a three year leaseback agreement with $10.8 millionrespect to be paidthe Property. We may terminate the leaseback no earlier than the first day of the eighteenth full calendar month of the term providing at least nine months’ notice. There is no assurance at this time that the purchaser will in cash atfact purchase any or all of the Property. The closing of the sale of the Property, which is subject to customary diligence and $0.5 million to be paid as earnout if certain sales levels are achieved in the calendar years of 2017 and 2018. The transactionclosing conditions, is expected to close duringoccur on or around November 20, 2019. The purchaser does not have any material relationship with us or our subsidiaries, other than through the second quarterPSA and Leaseback.
In connection with the sale leaseback contemplated by the PSA, on September 6, 2019, we made a clarifying amendment to our amended and restated credit agreement originally dated as of
fiscal 2017. We anticipateNovember 6, 2018, to make clear that
any sale and leaseback already permitted under the
acquisition of China Mist will give us a greater presence inasset sale covenant would not be inadvertently prohibited under the
high-growth premium tea industry. See Note 24, Subsequent Events, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.sale and leaseback covenant.
Important Factors Affecting Our Results of OperationsBusiness
We have identified factors that affect our industry and business which we expect to alsowill play an important role in our future growth and profitability. Some of these factors include:
| |
• | Demographic and Channel Trends.Our success is dependent upon our ability to develop new products in response to demographic and other trends to better compete in areas such as premium coffee and tea, including expansion of our product portfolio by investing resources in what we believe to be key growth categories, including the launch of our Metropolitan™ single cup coffee, expanded seasonal coffee and specialty beverages, new shelf-stable coffee products, new hot teas, the introduction of Collaborative Coffee™ branded products into the retail grocery channel, and the packaging redesign and product portfolio optimization of our Un Momento® retail branded product line.Investment in State-of-the-Art Facility and Capacity Expansion. We are focused on leveraging our investment in the Northlake, Texas, facility to produce the highest quality coffee in response to the market shift to premium and specialty coffee, support the transition of acquired product volumes, and create opportunities for customer acquisition and sustainable long-term growth. However, until we complete the transition of most manufacturing to our Northlake facility, we will continue to experience higher manufacturing costs driven by downtime associated with certain aging production infrastructure. Supply Chain Efficiencies and Competition. In order to compete effectively and capitalize on growth opportunities, we must retain and continue to grow our customer base, evaluate and undertake initiatives to reduce costs and streamline our supply chain. We continue to look for ways to deploy our personnel, systems, assets and infrastructure to create or enhance stockholder value. Areas of focus have included corporate staffing and structure, methods of procurement, logistics, inventory management, supporting technology, and real estate assets. Demographic and Channel Trends.Our success is dependent upon our ability to develop new products in response to demographic and other trends to better compete in areas such as premium coffee and tea, including expansion of our product portfolio by investing resources in what we believe to be key growth categories and different formats. Fluctuations in Green Coffee Prices. Our primary raw material is green coffee, an exchange-traded agricultural commodity that is subject to price fluctuations. Over the past five years, coffee “C” market near month price per pound ranged from approximately $0.96 to $1.90. The coffee “C” market near month price as of June 30, 2019 and |
| |
• | Fluctuations in Green Coffee Prices. Our primary raw material is green coffee, an agricultural commodity traded on the Commodities and Futures Exchange that is subject to price fluctuations. Over the past five years, coffee “C” market price per pound ranged from approximately $1.02 to $2.90. The coffee “C” market price as of June 30, 2016 and 2015 was $1.46 and $1.32 per pound, respectively. The price and availability of green coffee directly impacts our results of operations. For additional details, see Risk Factors in Part I, Item 1A of this report. |
2018 was $1.10 and $1.15 per pound, respectively. The price and availability of green coffee directly impacts our results of operations. For additional details, see Risk Factors in Part I, Item 1A of this report. Coffee Brewing Equipment and Service. We offer our customers a comprehensive equipment program and 24/7 nationwide equipment service which we believe differentiates us in the marketplace. We offer a full spectrum of equipment needs, which includes brewing equipment installation, water filtration systems, equipment training, and maintenance services to ensure we are able to meet our customer’s demands.
| |
| • | Hedging Strategy. We are exposed to market risk of losses due to changes in coffee commodity prices. Our business model strives to reduce the impact of green coffee price fluctuations on our financial results and to protect and stabilize our margins, principally through customer arrangements and derivative instruments, as further explained in Note 76, Derivative Instruments, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. In each of fiscal 2016 and fiscal 2015, a lower percentage of our roast and ground coffee volume was basedAnnual Report on a price schedule and a higher percentage was sold to customers under commodity-based pricing arrangements as compared to fiscal 2014.Form 10‑K. |
Sustainability. With an increasing focus on sustainability across the coffee and foodservice industry, and particularly from the customers we serve, it is important for us to embrace sustainability across our operations, in the quality of our products, as well as, how we treat our coffee growers. We believe that our collective efforts in measuring our social and environmental impact, creating programs for waste, water and energy reduction, promoting partnerships in our supply chain that aim at supply chain stability and food security, and focusing on employee engagement place us in a unique position to help retailers and foodservice operators create differentiated coffee and tea programs that can include sustainable supply chains, direct trade purchasing, training and technical assistance, recycling and composting networks, and packaging material reductions.
Supply Chain Efficiencies and Competition. In order to compete effectively and capitalize on growth opportunities, we must continue to evaluate and undertake initiatives to reduce costs and streamline our supply chain. We undertook the Corporate Relocation Plan, in part, to pursue improved production efficiency to allow us to provide a more cost-competitive offering of high-quality products. We continue to look for ways to deploy our personnel, systems, assets and infrastructure to create or enhance stockholder value. Areas of focus have included corporate staffing and structure, methods of procurement, logistics, inventory management, supporting technology, and real estate assets.
| |
• | Market Opportunities. We have invested and in the future may invest in acquisitions that we believe will enhance long-term stockholder value and complement or enhance our product, equipment, service and/or distribution offerings to existing and new customer bases. For example, subsequent to the fiscal year end, on September 9, 2016, we entered into an asset purchase agreement to acquire substantially all of the assets of China Mist as described in Note 24, Subsequent Events, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. We anticipate that the acquisition of China Mist will give us a greater presence in the high-growth premium tea industry. Additionally, in the first quarter of fiscal 2015 we acquired substantially all of the assets of Rae' Launo Corporation (“RLC”) as described in Note 2, Acquisition, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. |
Capacity Utilization. We calculate our utilization for all of our production facilities on an aggregate basis based on the number of product pounds manufactured during the actual number of production shifts worked during an average week, compared to the number of product pounds that could be manufactured based on the maximum number of production shifts that could be operated during the week (assuming three shifts per day, seven days per week), in each case, based on our current product mix. Utilization rates for our production facilities were approximately 90%, 66% and 65% during the fiscal years ended June 30, 2016, 2015 and 2014, respectively. The higher utilization rate in fiscal 2016 was due to the wind-down of production at our Torrance facility and the addition of those production volumes to our Portland and Houston production facilities. Since most of our customers do not commit to long-term firm production schedules, we are unable to forecast the level of customer orders with certainty to maximize utilization of manufacturing capacity. As a result, our production facility capacity utilization generally remains less than 100%.
Results of Operations
The following table sets forth information regarding our consolidated results of operations for the years ended June 30, 2019, 2018 and 2017. Certain prior period amounts in the table below have been reclassified to conform to the current year presentation due to the adoption of new accounting standards (in thousands, except percentages)::
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended June 30, | | 2019 vs 2018 | | 2018 vs 2017 |
| | 2019 | | 2018 | | 2017 | | Favorable (Unfavorable) | | Favorable (Unfavorable) |
| | | | | | | | Change | | % Change | | Change | | % Change |
| Net sales | $ | 595,942 |
| | $ | 606,544 |
| | $ | 541,500 |
| | $ | (10,602 | ) | | (1.7 | )% | | $ | 65,044 |
| | 12.0 | % |
| Cost of goods sold | 416,840 |
| | 399,155 |
| | 354,649 |
| | (17,685 | ) | | (4.4 | )% | | (44,506 | ) | | (12.5 | )% |
| Gross profit | 179,102 |
| | 207,389 |
| | 186,851 |
| | (28,287 | ) | | (13.6 | )% | | 20,538 |
| | 11.0 | % |
| Selling expenses | 139,647 |
| | 153,391 |
| | 133,534 |
| | 13,744 |
| | 9.0 | % | | (19,857 | ) | | (14.9 | )% |
| General and administrative expenses | 48,959 |
| | 49,429 |
| | 42,945 |
| | 470 |
| | 1.0 | % | | (6,484 | ) | | (15.1 | )% |
| Restructuring and other transition expenses | 4,733 |
| | 662 |
| | 11,016 |
| | (4,071 | ) | | (615.0 | )% | | 10,354 |
| | 94.0 | % |
| Net gain from sale of Torrance Facility | — |
| | — |
| | (37,449 | ) | | — |
| | NM |
| | (37,449 | ) | | 100.0 | % |
| Net gains from sale of Spice Assets | (593 | ) | | (770 | ) | | (919 | ) | | (177 | ) | | 23.0 | % | | (149 | ) | | 16.2 | % |
| Net losses (gains) from sales of other assets | 1,058 |
| | (196 | ) | | (1,210 | ) | | (1,254 | ) | | 639.8 | % | | (1,014 | ) | | 83.8 | % |
| Impairment losses on intangible assets | — |
| | 3,820 |
| | — |
| | 3,820 |
| | 100.0 | % | | (3,820 | ) | | NM |
|
| Operating expenses | 193,804 |
| | 206,336 |
| | 147,917 |
| | 12,532 |
| | 6.1 | % | | (58,419 | ) | | (39.5 | )% |
| (Loss) income from operations | (14,702 | ) | | 1,053 |
| | 38,934 |
| | (15,755 | ) | | (1,496.2 | )% | | (37,881 | ) | | (97.3 | )% |
| Other (expense) income: | | | | | | | | | | | | | |
| Dividend income | — |
| | 12 |
| | 1,007 |
| | (12 | ) | | (100.0 | )% | | (995 | ) | | (98.8 | )% |
| Interest income | — |
| | 2 |
| | 567 |
| | (2 | ) | | (100.0 | )% | | (565 | ) | | (99.6 | )% |
| Interest expense | (12,000 | ) | | (9,757 | ) | | (8,601 | ) | | (2,243 | ) | | 23.0 | % | | (1,156 | ) | | 13.4 | % |
| Pension settlement charge | (10,948 | ) | | — |
| | — |
| | (10,948 | ) | | NM |
| | — |
| | NM |
|
| Other, net | 4,166 |
| | 7,722 |
| | 5,459 |
| | (3,556 | ) | | (46.1 | )% | | 2,263 |
| | 41.5 | % |
| Total other (expense) income | (18,782 | ) | | (2,021 | ) | | (1,568 | ) | | (16,761 | ) | | 829.3 | % | | (453 | ) | | 28.9 | % |
| (Loss) income before taxes | (33,484 | ) | | (968 | ) | | 37,366 |
| | (32,516 | ) | | 3,359.1 | % | | (38,334 | ) | | (102.6 | )% |
| Income tax expense | 40,111 |
| | 17,312 |
| | 14,815 |
| | 22,799 |
| | 131.7 | % | | 2,497 |
| | 16.9 | % |
| Net (loss) income | $ | (73,595 | ) | | $ | (18,280 | ) | | $ | 22,551 |
| | $ | (55,315 | ) | | 302.6 | % | | $ | (40,831 | ) | | (181.1 | )% |
| Less: Cumulative preferred dividends, undeclared and unpaid | 535 |
| | 389 |
| | — |
| | 146 |
| | 37.5 | % | | 389 |
| | NM |
|
| Net (loss) income available to common stockholders | $ | (74,130 | ) | | $ | (18,669 | ) | | $ | 22,551 |
| | $ | (55,461 | ) | | 297.1 | % | | $ | (41,220 | ) | | (182.8 | )% |
_____________
NM - Not Meaningful
The following table presents changes in units sold, unit price and net sales by product category for the years ended June 30, 2019, 2018 and 2017 (in thousands, except unit price and percentages):
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended June 30, | | 2019 vs 2018 | | 2018 vs 2017 |
| | 2019 | | 2018 | | 2017 | | Favorable (Unfavorable) | | Favorable (Unfavorable) |
| | | | | | | | Change | | % Change | | Change | | % Change |
| Units sold | | | | | | | | | | | | | |
| Coffee (Roasted) | 86,478 |
| | 85,943 |
| | 76,399 |
| | 535 |
| | 0.62 | % | | 9,544 |
| | 12.49 | % |
| Coffee (Frozen Liquid) | 427 |
| | 407 |
| | 403 |
| | 20,000 |
| | 4.91 | % | | 4 |
| | 0.99 | % |
| Tea (Iced & Hot) | 2,755 |
| | 2,706 |
| | 2,482 |
| | 49 |
| | 1.81 | % | | 224 |
| | 9.02 | % |
| Culinary | 7,932 |
| | 9,227 |
| | 9,071 |
| | (1,295 | ) | | (14.03 | )% | | 156 |
| | 1.72 | % |
| Spice | 792 |
| | 933 |
| | 1,101 |
| | (141 | ) | | (15.11 | )% | | (168 | ) | | (15.26 | )% |
| Other beverages(1) | 4,631 |
| | 5,932 |
| | 3,986 |
| | (1,301 | ) | | (21.93 | )% | | 1,946 |
| | 48.82 | % |
| Total | 103,015 |
| | 105,148 |
| | 93,442 |
| | (2,133 | ) | | (2.03 | )% | | 11,706 |
| | 12.53 | % |
| | | | | | | | | | | | | | |
| Unit Price | | | | | | | | | | | | | |
| Coffee (Roasted) | $ | 4.38 |
| | $ | 4.42 |
| | $ | 4.44 |
| | $ | (0.04 | ) | | (0.90 | )% | | $ | (0.02 | ) | | (0.45 | )% |
| Coffee (Frozen Liquid) | $ | 80.89 |
| | $ | 85.49 |
| | $ | 81.46 |
| | $ | (4.60 | ) | | (5.38 | )% | | $ | 4.03 |
| | 4.95 | % |
| Tea (Iced & Hot) | $ | 12.02 |
| | $ | 12.00 |
| | $ | 11.79 |
| | $ | 0.02 |
| | 0.17 | % | | $ | 0.21 |
| | 1.78 | % |
| Culinary | $ | 8.08 |
| | $ | 6.98 |
| | $ | 6.13 |
| | $ | 1.10 |
| | 15.76 | % | | $ | 0.85 |
| | 13.87 | % |
| Spice | $ | 30.43 |
| | $ | 26.96 |
| | $ | 22.61 |
| | $ | 3.47 |
| | 12.87 | % | | $ | 4.35 |
| | 19.24 | % |
| Other beverages(1) | $ | 12.60 |
| | $ | 11.24 |
| | $ | 14.21 |
| | $ | 1.36 |
| | 12.10 | % | | $ | (2.97 | ) | | (20.90 | )% |
| Average unit price | $ | 5.79 |
| | $ | 5.77 |
| | $ | 5.80 |
| | $ | 0.02 |
| | 0.35 | % | | $ | (0.03 | ) | | (0.52 | )% |
| | | | | | | | | | | | | | |
| Total Net Sales By Product Category | | | | | | | | | | | | | |
| Coffee (Roasted) | $ | 378,583 |
| | $ | 379,951 |
| | $ | 339,358 |
| | $ | (1,368 | ) | | (0.36 | )% | | $ | 40,593 |
| | 11.96 | % |
| Coffee (Frozen Liquid) | 34,541 |
| | 34,794 |
| | 32,827 |
| | (253 | ) | | (0.73 | )% | | 1,967 |
| | 5.99 | % |
| Tea (Iced & Hot) | 33,109 |
| | 32,477 |
| | 29,256 |
| | 632 |
| | 1.95 | % | | 3,221 |
| | 11.01 | % |
| Culinary | 64,100 |
| | 64,432 |
| | 55,592 |
| | (332 | ) | | (0.52 | )% | | 8,840 |
| | 15.90 | % |
| Spice | 24,101 |
| | 25,150 |
| | 24,895 |
| | (1,049 | ) | | (4.17 | )% | | 255 |
| | 1.02 | % |
| Other beverages(1) | 58,367 |
| | 66,699 |
| | 56,653 |
| | (8,332 | ) | | (12.49 | )% | | 10,046 |
| | 17.73 | % |
| Net sales by product category | $ | 592,801 |
| | $ | 603,503 |
|
| $ | 538,581 |
|
| $ | (10,702 | ) | | (1.77 | )% | | $ | 64,922 |
| | 12.05 | % |
| Fuel Surcharge | 3,141 |
| | 3,041 |
| | 2,919 |
| | 100 |
| | 3.29 | % | | 122 |
| | 4.18 | % |
| Total | $ | 595,942 |
| | $ | 606,544 |
| | $ | 541,500 |
| | $ | (10,602 | ) | | (1.75 | )% | | $ | 65,044 |
| | 12.01 | % |
(1) Includes all beverages other than roasted coffee, frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee.
Fiscal Years Ended June 30, 20162019 and 20152018
Financial Highlights
Gross profit increased 5.8% to $208.5 million in fiscal 2016 from $197.0 million in fiscal 2015.
Gross margin increased to 38.3% in fiscal 2016 from 36.1% in fiscal 2015.
Income from operations increased 149.1% to $8.2 million in fiscal 2016 from $3.3 million in fiscal 2015.
Net income was $89.9 million, or $5.41 per diluted common share, in fiscal 2016, primarily due to non-cash income tax benefit of $80.3 million from the release of valuation allowance on deferred tax assets, compared to $0.7 million, or $0.04 per diluted common share, in fiscal 2015.
Fiscal 2016 Strategic Initiatives
In fiscal 2016, we undertook initiatives to reduce costs, streamline our supply chain, improve the breadth of products and services we provide to our customers, and better position the Company to attract new customers. These initiatives included the following:
| |
• | Corporate Relocation Plan. We continued to execute on the Corporate Relocation Plan that we initiated in the third quarter of fiscal 2015 by executing on the milestones described above under Corporate Relocation. |
Third-Party Logistics. During the second half of fiscal 2016, we replaced our long-haul fleet operations with 3PL. We expect that this transportation arrangement will reduce our fuel consumption and empty trailer miles, while improving our intermodal and trailer cube utilization.
Vendor Managed Inventory. During the second half of fiscal 2016, we entered into a vendor managed inventory arrangement with a third party. We anticipate that the use of vendor managed inventory arrangements will result in a reduction in raw material, finished goods and logistics costs, while improving packaging innovation and fulfillment.
DSD Reorganization. In fiscal 2016, we continued our efforts to improve efficiencies in our sales and product offerings. During the second half of fiscal 2016, we began to realign our DSD organization by undertaking initiatives intended to streamline communication and decision making, enhance branch organizational structure, and improve customer focus, including toward a comprehensive training program for all DSD team members to strengthen customer engagement. In fiscal 2016, we executed a regional test of our first advertising and lead generation campaign designed to improve our new customer acquisition rate within our DSD network.
Branch Consolidation and Property Sales. In an effort to streamline our branch operations, in the fourth quarter of fiscal 2016 we sold two Northern California branch properties, with a third Northern California property under contract for sale, and we acquired a new branch facility in Hayward, California.
| |
• | Introduction of Collaborative Coffee™ and Redesign of Un Momento® Branded Retail Products. In an effort to address what we believe to be unmet consumer needs and improve margin within the retail grocery environment, in fiscal 2016, we launched Collaborative Coffee™, a new brand of ethically sourced, whole bean direct trade coffees into the retail grocery channel. In addition, we completed a packaging redesign and product portfolio optimization of our Un Momento® retail branded product line.
|
Net Sales
Net sales in fiscal 20162019 decreased $1.5$10.6 million, or 0.3%1.7%, to $544.4$595.9 million from $545.9$606.5 million in fiscal 20152018. The decline in net sales was primarily due to a decrease in net sales from other beverages and spice products, a decline in revenues and volume of green coffee processed and tea products,sold through our DSD network, and the impact of lower coffee prices for our cost plus customers. The decrease in net sales was partially offset by an increase in sales from the addition of the Boyd Business which is fully reflected in the year ended June 30, 2019, compared to only nine months of Boyd Business operations in the year ended June 30, 2018. The impact of price decreases to customers utilizing commodity-based pricing arrangements was $6.9 million during the year ended June 30, 2019 as compared to $3.0 million in price decreases to customers utilizing such arrangements in the year ended June 30, 2018.
The following table presents the effect of changes in unit sales, unit pricing and product mix for the year ended June 30, 2019 compared to the same period in the prior fiscal year (in millions):
|
| | | | | | |
| | For Year Ended June 30, 2019 vs. 2018 | | % of Total Mix Change |
| Effect of change in unit sales | $ | (12.4 | ) | | (117.0 | )% |
| Effect of pricing and product mix changes | 1.8 |
| | 17.0 | % |
| Total decrease in net sales | $ | (10.6 | ) | | (100.0 | )% |
Unit sales decreased 2.0% and average unit price was essentially flat in the year ended June 30, 2019 as compared to the same prior year period, resulting in a decrease in net sales of spice products1.7%. In the latter part of the fiscal year ended June 30, 2019, we experienced higher mix of product being sold via direct ship versus DSD which will negatively impact future overall average unit price as direct ship has a lower average unit price. There were no new product category introductions in the year ended June 30, 2019 or 2018 which had a material impact on our net sales.
Gross Profit
Gross profit in fiscal 2019 decreased $28.3 million, or 13.6%, to $179.1 million from $207.4 million in fiscal 2018. Gross margin decreased to 30.1% in fiscal 2019 from 34.2% in fiscal 2018. The decrease in gross profit was primarily driven by lower net sales of $10.6 million and higher cost of goods sold. Cost of goods sold in the year ended June 30, 2019 increased $17.7 million, or 4.4%, to $416.8 million, or 69.9% of net sales, from $399.2 million, or 65.8% of net sales, in fiscal 2018. Margin was negatively impacted by higher coffee brewing equipment and labor costs associated with increased installation activity during the period, higher production costs associated with the production operations in the Northlake facility, including higher depreciation expense for the Northlake, Texas facility, higher manufacturing costs driven by downtime associated with certain aging production infrastructure and higher write-down of slow moving inventories. The negative margin impact was partially offset by lower green coffee prices as the average Arabica “C” market price of green coffee decreased 13.2% in fiscal 2019 as compared to the prior year period.
Operating Expenses
In fiscal 2019, operating expenses decreased $12.5 million, or 6.1%, to $193.8 million, or 32.5% of net sales from $206.3 million, or 34.0%, of net sales in fiscal 2018, primarily due to a $13.7 million decrease in selling expenses, the absence of $3.8 million in impairment losses on intangible assets reported in the prior year period and a $0.5 million decrease in general and administrative expenses, partially offset by a $4.1 million increase in restructuring and other beverages. transition expenses and a $1.3 million increase in net losses from sales of other assets.
The decreases in selling expenses and general and administrative expenses in fiscal 2019 was primarily due to synergies achieved from the integration of the Boyd Business and conclusion of the transition services and co-manufacturing agreements
with Boyd Coffee in the first half of fiscal 2019. In the fiscal year ended June 30, 2019, we paid Boyd Coffee a total of $3.7 million for services under these agreements, as compared to $25.4 million paid for such services in the fiscal year ended June 30, 2018.
Net losses from sales of assets in the fiscal year ended June 30, 2019 included net losses of $1.1 million from sales of other assets, primarily associated with the Boyd Coffee plant decommissioning offset by $0.6 million in earnout from the sale of spice assets, as compared to $0.8 million in earnout from the sale of spice assets and net gains of $0.2 million from sales of other assets in the prior year period.
Restructuring and other transition expenses increased $4.1 million in fiscal 2019, as compared to fiscal 2018. This increase includes $3.4 million, including interest, assessed by the Western Conference of Teamsters Pension Trust (the “WC Pension Trust”) in the fiscal year ended June 30, 2019, representing the Company’s share of the Western Conference of Teamsters Pension Plan (“WCTPP”) unfunded benefits due to the Company’s partial withdrawal from the WCTPP as a result of employment actions taken by the Company in 2016 in connection with the Corporate Relocation Plan. In addition, in the fiscal year ended June 30, 2019, we incurred $1.8 million in restructuring and other transition expenses, primarily employee-related costs, associated with the DSD Restructuring Plan, as compared to $1.0 million in restructuring and other transition expenses associated with the DSD Restructuring Plan in the fiscal year ended June 30, 2018.
Total Other (Expense) Income
Total other expense in the fiscal year ended June 30, 2019 was $18.8 million compared to $2.0 million fiscal year ended June 30, 2018. The change in total other expense in the fiscal year ended June 30, 2019 was primarily a result of a pension settlement charge in the amount of $10.9 million, higher interest expense and higher net losses on coffee-related derivative instruments.
The non-cash pension settlement charge incurred in the fiscal year ended June 30, 2019 was due to the termination of the Farmer Bros. Co. Pension Plan for Salaried Employees effective December 1, 2018. As a result of the pension plan termination, we expect to realize lower Pension Benefit Guaranty Corporation expenses in the future of approximately $0.3 million to $0.4 million per year.
Interest expense in the fiscal year ended June 30, 2019 increased $2.2 million to $12.0 million from $9.8 million in the prior year period. The increase in interest expense in the fiscal year ended June 30, 2019 was principally due to higher outstanding borrowings on our revolving credit facility, including borrowings for operations and borrowings related to the Boyd Business acquisition.
Other, net in the fiscal year ended June 30, 2019 decreased by $3.6 million to $4.2 million compared to in $7.7 million in the prior year period. The decrease in Other, net in the fiscal year ended June 30, 2019 was primarily due to increased mark-to-market losses on coffee-related derivative instruments not designated as accounting hedges.
Income Taxes
In the fiscal years ended June 30, 2019 and 2018, we recorded income tax expense of $40.1 million and $17.3 million, respectively. The $22.8 million increase in tax expense in the fiscal years ended June 30, 2019 is primarily due to a valuation allowance of $52.0 million recorded to reduce our deferred tax assets. See Note 19, Income Taxes, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K.
Fiscal Years Ended June 30, 2018 and 2017
Net Sales
Net sales in fiscal 20162018 increased $65.0 million, or 12.0%, to $606.5 million from $541.5 million in fiscal 2017 primarily due to the addition of the Boyd Business, which added $67.4 million of incremental sales to the current period and the addition of a full year of net sales from the China Mist and West Coast Coffee acquisitions, offset by a $2.5 million decline in our base business primarily due to a shortfall in DSD sales, the impact of pricing to our cost plus customers, and softness in a few large direct ship accounts. Net sales in fiscal 2018 included $9.7$3.0 million in price decreases to customers utilizing commodity-based pricing arrangements, where the changes in the green coffee commodity costs are passed on to the customer, as compared to $9.7$3.2 million in price increasesdecreases to customers utilizing such arrangements in fiscal 2015.2017.
The changefollowing table presents the effect of changes in netunit sales, in fiscal 2016unit pricing and product mix for the year ended June 30, 2018 compared to the same period in the prior fiscal 2015 was due to the following:year (in millions):
| | | (In millions) | Year Ended June 30, 2016 vs. 2015 | Year Ended June 30, 2018 vs. 2017 | | % of Total Mix Change |
| Effect of change in unit sales | $ | 14.4 |
| $ | 67.5 |
| | 103.8 | % |
| Effect of pricing and product mix changes | (15.9 | ) | (2.5 | ) | | (3.8 | )% |
| Total decrease in net sales | $ | (1.5 | ) | |
| Total increase in net sales | | $ | 65.0 |
| | 100.0 | % |
Unit sales increased 3.6%12.5% in fiscal 20162018 as compared to fiscal 2015,2017, but average unit price decreased by 3.8%0.5% resulting in a decreasean increase in net sales of 0.3%12.0%. The increase in unit sales wasThese increases were primarily due to a 3.4% increase in unit salesthe addition of roast and ground coffee products,the Boyd Business which accounted for approximately 61% of our totalincreased net sales while the decrease in averageby $67.4 million. Average unit price wasdecreased primarily due to the lower average unit price of roast and ground coffee products primarily driven by the pass-through of lower green coffee commodity purchasehedged costs to our customers. In fiscal 2016,2018, we processed and sold approximately 90.7107.4 million pounds of green coffee as compared to 87.7approximately 95.5 million pounds of green coffee processed and sold in fiscal 2015.2017. There were no new product category introductions in fiscal 20162018 or 20152017 which had a material impact on our net sales.
The following table presentsGross Profit
Gross profit in fiscal 2018 increased $20.5 million, or 11.0%, to $207.4 million from $186.9 million in fiscal 2017 and gross margin decreased to 34.2% in fiscal 2018 from 34.5% in fiscal 2017. This increase in gross profit was primarily driven by higher net sales
aggregated by product category forof $65.0 million due to the
respective periods indicated: |
| | | | | | | | | | | | | | |
| | | Year Ended June 30, |
| | | 2016 | | 2015 |
| (In thousands) | | $ | | % of total | | $ | | % of total |
| Net Sales by Product Category: | | | | | | | | |
| Coffee (Roast & Ground) | | $ | 332,533 |
| | 61 | % | | $ | 336,129 |
| | 60 | % |
| Coffee (Frozen Liquid) | | 35,933 |
| | 7 | % | | 37,428 |
| | 7 | % |
| Tea (Iced & Hot) | | 25,096 |
| | 4 | % | | 27,172 |
| | 5 | % |
| Culinary | | 54,036 |
| | 10 | % | | 54,208 |
| | 11 | % |
| Spice(1) | | 35,789 |
| | 6 | % | | 32,336 |
| | 6 | % |
| Other beverages(2) | | 57,690 |
| | 11 | % | | 54,933 |
| | 10 | % |
| Net sales by product category | | 541,077 |
| | 99 | % | | 542,206 |
| | 99 | % |
| Fuel surcharge | | 3,305 |
| | 1 | % | | 3,676 |
| | 1 | % |
| Net sales | | $ | 544,382 |
| | 100 | % | | $ | 545,882 |
| | 100 | % |
____________
(1) Spice product net sales included $3.2 million in sale of inventory to Harris at cost in fiscal 2016 upon conclusionaddition of the transition services providedBoyd Business partially offset by the Company in connection with the salehigher cost of Spice Assets.
(2) Includes all beverages other than coffee and tea.
Cost of Goods Sold
goods sold. Cost of goods sold in fiscal 2016 decreased $12.92018 increased $44.5 million, or 3.7%12.5%, to $335.9$399.2 million, or 61.7%65.8% of net sales, from $348.8$354.6 million, or 63.9%65.5% of net sales, in fiscal 2015.2017. The decreaseincrease in cost of goods sold was primarily due to the addition of the Boyd Business making up $41.4 million of the increase. Cost of goods sold as a percentage of net sales in fiscal 2016 was2018 increased primarily due to lower coffee commodityhigher manufacturing costs compared toassociated with the same periodproduction operations in the prior fiscal year, supply chain efficiencies realized primarily throughNorthlake, Texas facility including higher depreciation expense for the consolidation of our former Torrance coffee production volumes into our Houston manufacturing facility, and other supply chain improvements.facility. The average Arabica "C”“C” market price of green coffee decreased 24.8%15.5% in fiscal 2016. Inventories decreased at the end of fiscal 2016 compared to fiscal 2015 primarily due to production consolidation and the sale of processed and unprocessed inventories to Harris at cost upon conclusion of the transition services provided by the Company in connection with the sale of Spice Assets. As a result, a beneficial effect of liquidation of LIFO inventory quantities in the amount of $4.2 million was recorded in cost of goods sold in fiscal 2016 reducing cost of goods sold by the same amount. In fiscal 2015 $4.9 million in beneficial effect of liquidation of LIFO inventory quantities was recorded.
Gross Profit
Gross profit in fiscal 2016 increased $11.4 million, or 5.8%, to $208.5 million from $197.0 million in the prior fiscal year and gross margin increased to 38.3% in fiscal 2016 from 36.1% in the prior fiscal year. The increase in gross profit was primarily due to lower coffee commodity costs compared to the same period in the prior fiscal year, supply chain efficiencies realized primarily through the consolidation of our former Torrance coffee production volumes into our Houston manufacturing facility and other supply chain improvements. Gross profit in fiscal 2016 and 2015 included the beneficial effect of the liquidation of LIFO inventory quantities in the amount of $4.2 million and $4.9 million, respectively.2018.
Operating Expenses
In fiscal 2016,2018, operating expenses increased $6.5$58.4 million, or 3.4%39.5%, to $200.3$206.3 million, or 36.8%34.0% of net sales from $193.8$147.9 million, or 35.5%27.3%, of net sales in fiscal 2015,2017, primarily due to higher general and administrative expenses and restructuring and other transition expenses associated with the Corporate Relocation Plan as compared toeffect of the prior fiscal year. General and administrative expenses and restructuring and other transition expenses increased $10.8recognition of $37.4 million and $6.1 million, respectively,in net gain from the sale of the Torrance Facility in fiscal 2016, as compared to the prior fiscal year, partially offset by2017, a $1.6$19.9 million decreaseincrease in selling expenses. Theexpenses, a $6.5 million increase in general and administrative expenses and $3.8 million in impairment losses on intangible assets in fiscal 2016 as compared to fiscal 2015 was primarily due to higher accruals for incentive compensation to eligible employees as compared to a reduction in accrual for incentive compensation to eligible employees in the prior fiscal year, an increase in employee and retiree medical costs, workers' compensation expense and the write-off of a long-term loan receivable that was deemed uncollectible.2018. The increase in general and administrativeoperating expenses was partially offset by $5.6a $10.4 million in net gains from sale of Spice Assets and $2.8 million in net gains from sales of assets, primarily real estate, as compared to $(0.4) million in net losses from sales of assets, primarily vehicles, in fiscal 2015. The decrease in selling expenses in fiscal 2016 as compared to fiscal 2015 was primarily due to lower depreciation and amortization expense and lower vehicle, fuel and freight expenses, partially offset by higher accruals for incentive compensation for eligible employees as compared to a reduction in accrual for incentive compensation to eligible employees in the prior fiscal year.
Income from Operations
Income from operations in fiscal 2016 was $8.2 million as compared to $3.3 million in fiscal 2015 primarily due to higher gross profit, net gains from the sale of Spice Assets and certain real estate assets and lower selling expenses, partially offset by higher restructuring and other transition expenses associated with the Corporate Relocation Plan and the DSD Restructuring Plan.
In fiscal 2018, selling expenses and general and administrative expenses.expenses increased $19.9 million and $6.5 million, respectively. The increases in selling expenses and general and administrative expenses during fiscal 2018 were primarily driven by the addition of the Boyd Business which added $18.9 million and $4.4 million, respectively, to selling expenses and general and administrative expenses exclusive of their related depreciation and amortization expense, acquisition and integration costs of $7.6 million, and an increase of $7.5 million in depreciation and amortization expense, partially offset by the absence of $5.2 million in non-recurring 2016 proxy contest expenses incurred in fiscal 2017.
Restructuring and other transition expenses decreased $10.4 million in fiscal 2018, as compared to fiscal 2017 due to the absence of expenses related to our Corporate Relocation Plan, partially offset by $0.7 million in costs incurred in connection with the DSD Restructuring Plan in fiscal 2018.
In fiscal 2018 and 2017 net gains from sale of spice assets included $0.8 million and $0.9 million, respectively, in earnout.
In our annual test of impairment as of January 31, 2018 and assessment of the recoverability of certain finite-lived intangible assets, we determined that the trade name/trademark and customer relationships intangible assets acquired in connection with the China Mist acquisition were impaired as the carrying value exceeded the estimated fair value. Accordingly, we recorded total impairment charges of $3.8 million in fiscal 2018.
Total Other (Expense) Income (Expense)
Total other incomeexpense in fiscal 20162018 was $1.7$2.0 million as compared to $1.6 million in fiscal 2017. The change in total other expense of $(2.2) million in fiscal 2015,2018 was primarily duea result of liquidating substantially all of our investment in preferred securities in the fourth quarter of fiscal 2017 to net gains on derivative instrumentsfund expenditures associated with our Northlake, Texas facility and investments of $0.3 million in fiscal 2016higher interest expense as compared to net lossesfiscal 2017, partially offset by the change in estimated fair value of the China Mist contingent earnout consideration.
Net gains on derivative instruments and investments of $(3.3) million in fiscal 2015. The net gains and net losses on derivative instruments and investments in fiscal 20162018 and 2017 were $7,000 and $286,000, respectively. Net losses on coffee-related derivative instruments in fiscal 2015,2018 and 2017 were $0.5 million and $1.8 million, respectively, were primarily due to mark-to-market net gains and net losses on coffee-related derivative instruments not designated as accounting hedges. Net gains on such coffee-related derivative instruments
Interest expense in fiscal 2016 were $0.32018 was $9.8 million as compared to net losses of $(3.0)$8.6 million in fiscal 2015. In2017. The higher interest expense in fiscal 2016 and 2015, we recognized $(0.6) million and $(0.3) million in net losses on coffee-related derivative instruments designated as cash flow hedges2018 was primarily due to ineffectiveness.higher outstanding borrowings on our revolving credit facility.
Income Taxes
In fiscal 2016,2018, we released $80.3 million of the valuation allowance on deferred tax assets, resulting in unreserved deferred tax assets of $90.2 million at June 30, 2016 and a non-cash reduction inrecorded income tax expense or a tax benefit of $80.0$17.3 million in fiscal 2016 as compared to income tax expense of $(0.4)$14.8 million in fiscal 2015. In fiscal 2016, total deferred tax assets were largely unchanged. Deferred tax assets related to our defined benefit pension plans and retiree medical plan increased due to losses recorded in OCI, and net operating loss related to deferred tax assets declined as losses were used to offset current income. In fiscal 2015, deferred tax assets increased primarily due to losses recorded in Other comprehensive income (loss) ("OCI") related to coffee-related derivative instruments, our defined benefit pension plans and retiree medical plan.
Since 2009, a full valuation allowance has been maintained to offset our deferred tax assets. In the fourth quarter of fiscal 2016, after analyzing the available positive and negative evidence, we concluded that it is more likely than not that we will utilize a portion of our tax loss carryforwards. In this analysis, we considered the following items of positive evidence: twelve quarters of our cumulative gain position and our forecasted future earnings; completion of parts of our restructuring plan which significantly reduced costs; and sale of our Torrance facility which is expected to result in a significant gain in the first quarter of fiscal 2017. We also considered the following items of negative evidence: large pension related OCI losses that we recorded in the prior twelve quarters and potential expiration of certain state unused net operating loss carryforwards and credits.
We cannot conclude that certain state net operating loss carryforwards and tax credit carryovers will be utilized before expiration. Accordingly, we will maintain a valuation allowance of $1.6 million to offset these deferred tax assets. We will continue to monitor all available evidence, both positive and negative, in determining whether it is more likely than not that the Company will realize its remaining deferred tax assets.
The Internal Revenue Service is currently auditing our tax years ended June 30, 2013 and 2014.
Net Income
As a result of the foregoing factors, net income was $89.9 million, or $5.41 per diluted common share, in fiscal 2016 as compared to $0.7 million, or $0.04 per diluted common share, in fiscal 2015.
Fiscal Years Ended June 30, 2015 and 2014
Overview
In fiscal 2015, we continued our efforts to improve efficiencies in our sales and product offerings. These efforts included targeted selling efforts in untapped markets, sales and marketing training for all of our RSRs, and the discontinuation over 300 SKUs, excluding the SKUs added from the RLC Acquisition. We also continued to expand our product portfolio by investing resources in what we believe to be key growth categories, including the launch of our Metropolitan™ single cup coffee, expanded seasonal coffee and specialty beverages, new shelf-stable coffee products, and new hot teas.
Net Sales
Net sales in fiscal 2015 increased $17.5 million, or 3.3%, to $545.9 million from $528.4 million in fiscal 2014. The increase in net sales in fiscal 2015 included $9.7 million in price increases to customers utilizing commodity-based pricing arrangements, where the changes in the green coffee commodity costs are passed on to the customer.
The change in net sales in fiscal 2015 compared to fiscal 2014 was due to the following: |
| | | |
| (In millions) | Year Ended June 30, 2015 vs. 2014 |
| Effect of change in unit sales | $ | (2.0 | ) |
| Effect of pricing and product mix changes | 19.5 |
|
| Total increase in net sales | $ | 17.5 |
|
Unit sales decreased (0.2)% in fiscal 2015 as compared to fiscal 2014, fully offset by a 3.5% increase in average unit price resulting in an increase in net sales of 3.3%. The decrease in unit sales was primarily due to a (0.7)% decrease in unit sales of roast and ground coffee products, which accounted for approximately 61% of our total net sales, while the increase in average unit price was primarily due to the higher average unit price of roast and ground coffee products primarily driven by the pass-through of higher green coffee commodity purchase costs to our customers. In fiscal 2015, we processed and sold approximately 87.7 million pounds of green coffee as compared to approximately 88.3 million pounds of green coffee processed and sold in fiscal 2014. There were no new product category introductions in fiscal 2015 or 2014 which had a material impact on our net sales.
The following table presents net sales aggregated by product category for the respective periods indicated: |
| | | | | | | | | | | | | | |
| | | Year Ended June 30, |
| | | 2015 | | 2014 |
| (In thousands) | | $ | | % of total | | $ | | % of total |
| Net Sales by Product Category: | | | | | | | | |
| Coffee (Roast & Ground) | | $ | 336,129 |
| | 61 | % | | $ | 319,251 |
| | 60 | % |
| Coffee (Frozen Liquid) | | 37,428 |
| | 7 | % | | 37,840 |
| | 7 | % |
| Tea (Iced & Hot) | | 27,172 |
| | 5 | % | | 28,452 |
| | 5 | % |
| Culinary | | 54,208 |
| | 10 | % | | 56,567 |
| | 11 | % |
| Spice | | 32,336 |
| | 6 | % | | 31,876 |
| | 6 | % |
| Other beverages(1) | | 54,933 |
| | 10 | % | | 50,572 |
| | 10 | % |
| Net sales by product category | | 542,206 |
| | 99 | % | | 524,558 |
| | 99 | % |
| Fuel surcharge | | 3,676 |
| | 1 | % | | 3,822 |
| | 1 | % |
| Net sales | | $ | 545,882 |
| | 100 | % | | $ | 528,380 |
| | 100 | % |
____________
(1) Includes all beverages other than coffee and tea.
Cost of Goods Sold
Cost of goods sold in fiscal 2015 increased $16.4 million, or 4.9%, to $348.8 million, or 63.9% of net sales, from $332.5 million, or 62.9% of net sales in fiscal 2014. The increase in cost of goods sold as a percentage of net sales in fiscal 2015 was primarily due to a 16.2% increase in the average Arabica "C” market price of green coffee. Inventories decreased at the end of fiscal 2015 compared to fiscal 2014 and, therefore, a beneficial effect of liquidation of LIFO inventory quantities in the amount of $4.9 million was recorded in cost of goods sold in fiscal 2015 reducing cost of goods sold by the same amount. No beneficial effect of liquidation of LIFO inventory quantities was recorded in fiscal 2014.
Gross Profit
Gross profit in fiscal 2015 increased $1.1 million, or 0.6%, to $197.0 million from $195.9 million in fiscal 2014, but gross margin decreased to 36.1% in fiscal 2015 from 37.1% in the prior fiscal year. The increase in gross profit was primarily due to the increase in net sales from higher prices of roast and ground coffee, frozen liquid coffee, tea products, spice and other beverages. The decrease in gross margin was primarily due to a 16.9% increase in the average “C” market price of green coffee as compared to the prior fiscal year. Gross profit in fiscal 2015 included the beneficial effect of the liquidation of LIFO inventory quantities in the amount of $4.9 million.
Operating Expenses
In fiscal 2015, operating expenses increased $6.8 million, or 3.6%, to $193.8 million, or 35.5% of net sales, from $187.0 million, or 35.4% of net sales, in fiscal 2014, primarily due to $10.4 million in restructuring and other transition expenses associated with the Corporate Relocation Plan. In fiscal 2015 selling expenses decreased $(3.3) million and general and administrative expenses decreased $(4.6) million as compared to fiscal 2014. The decrease in selling expenses in fiscal 2015 as compared to fiscal 2014 was primarily due to lower depreciation and amortization expense, bonus expense and salaries-related expense offset by an increase in workers' compensation expense. The decrease in general and administrative expenses in fiscal 2015 as compared to fiscal 2014 was primarily due to lower depreciation and amortization expense, bonus expense, consulting expense and the absence of expenses in connection with the restatement of certain prior period financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013. This decrease in general and administrative expenses was partially offset by an increase in salaries-related expense, employee and retiree medical expense, ESOP compensation expense and workers' compensation expense. Operating expenses in fiscal 2015 also reflected $(0.4) million in net losses from sales of assets, primarily vehicles, as compared to $3.8 million in net gains from sales of assets, primarily real estate, in fiscal 2014.
Income from Operations
Income from operations in fiscal 2015 was $3.3 million compared to $8.9 million in fiscal 2014 primarily due to restructuring and other transition expenses associated with the Corporate Relocation Plan and lower gross profit partially offset by the decrease in selling expenses and general administrative expenses.
Total Other Income (Expense)
Total other expense in fiscal 2015 was $(2.2) million compared to total other income of $3.9 million in fiscal 2014, primarily due to net losses on derivative instruments and investments of $(3.3) million compared to net gains on derivative instruments and investments of $3.1 million in fiscal 2014. The net losses and net gains on derivative instruments and investments in fiscal 2015 and fiscal 2014, respectively, were primarily due to mark-to-market net losses and net gains, respectively, on coffee-related derivative instruments not designated as accounting hedges. Net losses on such coffee-related derivative instruments in fiscal 2015 were $(3.0) million compared to net gains on such coffee-related derivative instruments in fiscal 2014 of $2.7 million. In each of the fiscal years ended June 30, 2015 and 2014, we recognized $(0.3) million in losses on coffee-related derivative instruments designated as cash flow hedges due to ineffectiveness.
Income Taxes
In fiscal 2015, we recorded income tax expense of $0.4 million compared to $0.7 million in fiscal 2014. Income tax expense in fiscal 2015 was primarily attributable to cash taxes paid.
As of June 30, 2015,2018, our net deferred tax assets totaled $39.3 million, a decrease of $14.6 million from net deferred tax assets of $53.9 million at June 30, 2017. These changes are primarily the Company has generated approximately $0.6 million of excess tax benefits related to stock compensation, the benefit of which will be recorded to additional paid in capital if and when realized.
Net Income
As a result of the
foregoing factors, net income was $0.7 million, or $0.04 per diluted common share, in fiscal 2015 compared to $12.1 million, or $0.76 per diluted common share, in fiscal 2014.Tax Cuts and Jobs Act enacted on December 22, 2017. See Note 19.
Non-GAAP Financial Measures
In addition to net (loss) income determined in accordance with U.S. generally accepted accounting principles (“GAAP”), we use the following non-GAAP financial measures in assessing our operating performance:
“Non-GAAP net income”EBITDA” is defined as net income excluding the impact of:
restructuring and other transition expenses;
net gains and losses from sales of assets; and
income tax benefit, including the release of valuation allowance on deferred tax assets.
“Non-GAAP net income per diluted common share” is defined as Non-GAAP net income divided by the weighted-average number of common shares outstanding, inclusive of the dilutive effect of common equivalent shares outstanding during the period.
“Adjusted EBITDA” is defined as net(loss) income excluding the impact of:
income taxes;
interest expense; and
depreciation and amortization expense.
“EBITDA Margin” is defined as EBITDA expressed as a percentage of net sales.
“Adjusted EBITDA” is defined as net (loss) income excluding the impact of:
income taxes;
interest expense;
(loss) income from short-term investments;
depreciation and amortization expense;
ESOP and share-based compensation expense;
non-cash impairment losses;
non-cash pension withdrawal expense;
other similar non-cash expenses;
restructuring and other transition expenses; and
Severance costs
net gains and losses from sales of assets.assets;
non-cash pension settlement charges; and
acquisition and integration costs.
“Adjusted EBITDA Margin” is defined as Adjusted EBITDA expressed as a percentage of net sales.
Restructuring and other transition expenses are expenses that are directly attributable to (i) the Corporate Relocation Plan, consisting primarily of employee retention and separation benefits, pension withdrawal expense, facility-related costs and other related costs such as travel, legal, consulting and other professional services.services; and (ii) the DSD Restructuring Plan, consisting primarily of severance, prorated bonuses for bonus eligible employees, contractual termination payments and outplacement services, and other related costs, including legal, recruiting, consulting, other professional services, and travel.
In fiscal 2019, for purposes of calculating EBITDA and EBITDA Margin and Adjusted EBITDA and Adjusted EBITDA Margin, we have excluded the impact of interest expense resulting from the adoption of ASU 2017-07, non-cash pretax pension settlement charge resulting from the amendment and termination of the Farmer Bros. Plan effective December 1, 2018 and severance because these items are not reflective of our ongoing operating results. See Note 2, Summary of Significant Accounting Policies--Recently Adopted Accounting Standards, of the Notes to Consolidated Financial Statements included in this report on Form 10-K. We believe these non-GAAP financial measures provide a useful measure of the Company’s operating results, a meaningful comparison with historical results and with the results of other companies, and insight into the Company'sCompany’s ongoing operating performance. Further, management utilizes these measures, in addition to GAAP measures, when evaluating and comparing the Company'sCompany’s operating performance against internal financial forecasts and budgets.
In the fourth quarter of fiscal 2016, we modified the calculation of Non-GAAP net income and Non-GAAP net income per diluted common share to exclude the non-cash income tax benefit from the release of valuation allowance on deferred tax assets. We believe this non-cash incomethat EBITDA facilitates operating performance comparisons from period to period by isolating the effects of certain items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax benefit is not reflectivepositions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and EBITDA Margin because (i) we believe that these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing
our ability to service or incur indebtedness, and (iii) we use these measures internally as benchmarks to compare our performance to that of our ongoing operating results and that excluding the income tax benefit will help investors with comparability of our results. The historical presentation of the non-GAAP measures was not affected by this modification.competitors.
Non-GAAP net income, Non-GAAP net income per diluted common share,EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin, as defined by us, may not be comparable to similarly titled measures reported by other companies. We do not intend for non-GAAP financial measures to be considered in isolation or as a substitute for other measures prepared in accordance with GAAP.
SetPrior year periods set forth in the tables below is a reconciliationhave been retrospectively adjusted to reflect the impact of reported net incomethe adoption of new accounting standards. See Note 2, Summary of Significant Accounting Policies--Recently Adopted Accounting Standards, of the Notes to Non-GAAP net income and reported net income per common share-diluted to Non-GAAP net income per diluted common share:
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Net income, as reported | | $ | 89,918 |
| | $ | 652 |
| | $ | 12,132 |
|
| Restructuring and other transition expenses | | 16,533 |
| | 10,432 |
| | — |
|
| Net gains from sale of Spice Assets | | (5,603 | ) | | — |
| | — |
|
| Net (gains) losses from sales of assets | | (2,802 | ) | | 394 |
| | (3,814 | ) |
| Non-cash income tax benefit, including release of valuation allowance on deferred tax assets | | (80,439 | ) | | — |
| | — |
|
| Non-GAAP net income | | $ | 17,607 |
| | $ | 11,478 |
| | $ | 8,318 |
|
| | | | | | | |
| Net income per common share—diluted, as reported | | $ | 5.41 |
| | $ | 0.04 |
| | $ | 0.76 |
|
| Impact of restructuring and other transition expenses | | $ | 1.00 |
| | $ | 0.64 |
| | $ | — |
|
| Impact of net gains from sale of Spice Assets | | $ | (0.34 | ) | | $ | — |
| | $ | — |
|
| Impact of net (gains) losses from sales of assets | | $ | (0.17 | ) | | $ | 0.03 |
| | $ | (0.24 | ) |
| Impact of release of valuation allowance on deferred tax assets | | $ | (4.84 | ) | | $ | — |
| | $ | — |
|
| Non-GAAP net income per diluted common share | | $ | 1.06 |
| | $ | 0.71 |
| | $ | 0.52 |
|
Consolidated Financial Statements included in this report on Form 10-K.
Set forth below is a reconciliation of reported net (loss) income to EBITDA (unaudited):
|
| | | | | | | | | | | | |
| | | For the Year Ended June 30, |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Net (loss) income, as reported | | $ | (73,595 | ) | | $ | (18,280 | ) | | $ | 22,551 |
|
| Income tax expense | | 40,111 |
| | 17,312 |
| | 14,815 |
|
| Interest expense(1) | | 6,036 |
| | 3,177 |
| | 2,185 |
|
| Depreciation and amortization expense | | 31,065 |
| | 30,464 |
| | 22,970 |
|
| EBITDA | | $ | 3,617 |
| | $ | 32,673 |
| | $ | 62,521 |
|
| EBITDA Margin | | 0.6 | % | | 5.4 | % | | 11.5 | % |
| |
| (1) | Excludes $6.1 million, $6.6 million and $6.4 million in the fiscal years ended June 30, 2019, 2018 and 2017, respectively, resulting from the adoption of ASU 2017-07. |
Set forth below is a reconciliation of reported net (loss) income to Adjusted EBITDA:EBITDA (unaudited):
| | | | | Year Ended June 30, | | Year Ended June 30, |
| (In thousands) | | 2016 | | 2015 | | 2014 | | 2019 | | 2018 | | 2017 |
| Net income, as reported | | $ | 89,918 |
| | $ | 652 |
| | $ | 12,132 |
| |
| Income tax (benefit) expense | | (79,997 | ) | | 402 |
| | 705 |
| |
| Net (loss) income, as reported | | | $ | (73,595 | ) | | $ | (18,280 | ) | | $ | 22,551 |
|
| Income tax expense | | | 40,111 |
| | 17,312 |
| | 14,815 |
|
Interest expense | | 425 |
| | 769 |
| | 1,258 |
| | 6,036 |
| | 3,177 |
| | 2,185 |
|
| Income from short-term investments | | | — |
| | (19 | ) | | (1,853 | ) |
| Depreciation and amortization expense | | 20,774 |
| | 24,179 |
| | 27,334 |
| | 31,065 |
| | 30,464 |
| | 22,970 |
|
| ESOP and share-based compensation expense | | 4,342 |
| | 5,691 |
| | 4,692 |
| | 3,723 |
| | 3,822 |
| | 3,959 |
|
| Restructuring and other transition expenses | | 16,533 |
| | 10,432 |
| | — |
| |
| Restructuring and other transition expenses(2) | | | 4,733 |
| | 662 |
| | 11,016 |
|
| Net gain from sale of Torrance Facility | | | — |
| | — |
| | (37,449 | ) |
| Net gains from sale of Spice Assets | | (5,603 | ) | | — |
| | — |
| | (593 | ) | | (770 | ) | | (919 | ) |
| Net (gains) losses from sales of assets | | (2,802 | ) | | 394 |
| | (3,814 | ) | |
| Net losses (gains) from sales of other assets | | | 1,058 |
| | (196 | ) | | (1,210 | ) |
| Impairment losses on intangible assets | | | — |
| | 3,820 |
| | — |
|
| Pension settlement charge | | | 10,948 |
| | — |
| | — |
|
| Non-recurring 2016 proxy contest-related expenses | | | — |
| | — |
| | 5,186 |
|
| Acquisition and integration costs | | | 6,123 |
| | 7,570 |
| | 1,734 |
|
| Severance | | 2,273,000 |
| 2,273 |
| | — |
| | — |
|
| Adjusted EBITDA | | $ | 43,590 |
| | $ | 42,519 |
| | $ | 42,307 |
| | $ | 31,882 |
| | $ | 47,562 |
| | $ | 42,985 |
|
| Adjusted EBITDA Margin | | 8.0 | % | | 7.8 | % | | 8.0 | % | | 5.3 | % | | 7.8 | % | | 7.9 | % |
________
| |
| (1) | Excludes $6.1 million, $6.6 million and $6.4 million in the fiscal years ended June 30, 2019, 2018 and 2017, respectively, resulting from the adoption of ASU 2017-07. |
| |
| (2) | Fiscal year ended June 30, 2019, includes $3.4 million, including interest, assessed by the WC Pension Trust representing the Company’s share of the WCTPP unfunded benefits due to the Company’s partial withdrawal from the WCTPP as a result of employment actions taken by the Company in 2016 in connection with the Corporate Relocation Plan, net of payments of $0.8 million. |
Liquidity, Capital Resources and Financial Condition
Credit Facility
We maintainOn November 6, 2018, the Company entered into a $75.0new $150.0 million senior secured revolving credit facility (the “Revolving“New Revolving Facility”) with Bank of America, N.A, Citibank, N.A., JPMorgan Chase Bank, N.A., PNC Bank, National Association, Regions Bank, and SunTrust Bank, (collectively, the “Lenders”), with a sublimit on letters of credit and swingline loans of $30.0 million and $15.0 million respectively.each. The New Revolving Facility includes an accordion feature whereby wethe Company may increase the Revolving Commitment byrevolving commitments or enter into one or more tranches of incremental term loans, up to an additional $50.0$75.0 million in aggregate of increased commitments and incremental term loans, subject to certain conditions. AdvancesThe commitment fee is based on a leverage grid and ranges from 0.20% to 0.40%. Borrowings under the New Revolving Facility bear interest based on a leverage grid with a range of PRIME + 0.25% to PRIME + 0.875% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 1.875%. Effective March 27, 2019, we entered into an interest rate swap utilizing a notional amount of $80.0 million, with an effective date of April 11, 2019 and a maturity date of October 11, 2023. Under the terms of the interest rate swap, we receive 1-month LIBOR, subject to a 0% floor, and make payments based on a fixed rate of 2.1975%. The Company’s obligations under the interest rate swap agreement are secured by the collateral which secures the loans under the New Revolving Facility on a pari passu and pro rata basis with the principal of such loans. We have designated the interest rate swap derivative instruments as a cash flow hedge.
Under the New Revolving Facility, we are subject to a variety of affirmative and negative covenants of types customary in a senior secured lending facility, including financial covenants relating to leverage and interest expense coverage. We are allowed to pay dividends, provided, among other things, a total net leverage ratio is met, and no default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The New Revolving Facility matures on November 6, 2023, subject to our ability (subject to certain conditions) to agree with lenders who so consent to extend the maturity date of the commitments of such consenting lenders for a period of one year, such option being exercisable not more than two times during the term of the facility.
The New Revolving Facility replaced, by way of amendment and restatement, our senior secured revolving credit facility (the “Prior Revolving Facility”) with JPMorgan Chase Bank, N.A. and SunTrust Bank, with revolving commitments of $125.0 million as of September 30, 2018 and $135.0 million as of October 18, 2018 (the “Third Amendment Effective Date”), subject to an accordion feature. Under the Prior Revolving Facility, as amended, advances were based on our eligible accounts receivable, eligible inventory and equipment, the value of certain real property and trademarks, and an amount based on the lesser of $10.0 million (subject to monthly reduction) and the sum of certain eligible accounts receivable and inventory, less required reserves. The commitment fee ranges fromwas a flat fee of 0.25% to 0.375% per annum based on average revolver usage.annum. Outstanding obligations arewere collateralized by all of our assets, excluding, amongst other things, certain real property not included in the borrowing base, machinery and equipment (other than inventory), and our preferred stock portfolio.base. Borrowings under the Prior Revolving Facility bearbore interest based on average historical excess availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%. We are; provided, that, after the Third Amendment Effective Date, (i) the applicable rate was PRIME + 0.25% or Adjusted LIBO Rate + 1.75%; and (ii) loans up to certain formula amounts were subject to an additional margin ranging from 0.375% to 0.50%. The Prior Revolving Facility included a variety of affirmative and negative
covenants of types customary in an asset-based lending facility, including a financial covenantscovenant relating to the maintenance of a fixed charge coverage ratio, in certain circumstances, and the rightprovided for customary events of the Lenders to establish reserve requirements, which may reduce the amount of credit otherwise available to us. We are allowed to pay dividends, provided, among other things, certain excess availability requirements are met, and no event of default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The Revolving Facility expires on March 2, 2020.default.
At June 30, 2016,2019, we were eligible to borrow up to a total of $58.6$150.0 million under the New Revolving Facility and had outstanding borrowings of $0.1$92.0 million and had utilized $11.9$2.3 million of the letters of credit sublimit, and had excess availability under the Revolving Facility of $46.6 million.sublimit. At June 30, 2016,2019 and 2018, the weighted average interest rate on our outstanding borrowings subject to interest rate variability under the New Revolving Facility was 1.64%. At June 30, 2016,3.98% and 4.10%, respectively, and we were in compliance with all of the restrictive covenants under the New Revolving Facility.
At August 31, 2016,September 3, 2019, we were eligible to borrow up to a total of $150.0 million under the New Revolving Facility and had estimated outstanding borrowings of $0.2$100.0 million and utilized $11.9$2.3 million of the letters of credit sublimit,sublimit.
We classify borrowings contractually due to be settled one year or less as short-term and had excess availabilitymore than one year as long-term. Outstanding borrowings under the Revolving Facility of $46.5 million. At August 31, 2016, the weighted average interest rateour revolving credit facility were classified on our outstandingconsolidated balance sheets as “Long-term borrowings under the Revolving Facility was 1.65%.revolving credit facility” at June 30, 2019 and “Short-Term borrowings under revolving credit facility” at June 30, 2018.
Liquidity
We generally finance our operations through cash flows from operations and borrowings under our Revolving Facility described above. At June 30, 2016,revolving credit facility. In fiscal 2018, we had $21.1 millionfiled a shelf registration statement with the SEC which allows us to issue unspecified amounts of common stock, preferred stock, depository shares, warrants for the purchase of shares of common stock or preferred stock, purchase contracts for the purchase of equity securities, currencies or commodities, and units consisting of any combination of any of the foregoing securities, in cashone or more series, from time to time and cash equivalents and $25.6 million in short-term investments.one or more offerings up to a total dollar amount of $250.0 million. We believe our New Revolving Facility, to the extent available, in addition to our cash flows from operations, and other liquid assets, the net proceeds from the sale of the Spice Assets and the proceeds from the sale of our Torrance facility, collectively, will be sufficient to fund our working capital and capital expenditure requirements for the next 12 months.
Our New Revolving Facility includes financial covenants that are tested each fiscal quarter. The ratio of consolidated total indebtedness (net of unrestricted cash up to 18 months including$7.5 million) to adjusted EBITDA must not exceed 3.5 to 1.0. The ratio of adjusted EBITDA to consolidated interest expense must not be less than 3.0 to 1.0. As of June 30, 2019, we were in compliance with both financial covenants.
At June 30, 2019, we had $7.0 million in cash and cash equivalents and none of the expected capital expenditures associated with the Corporate Relocation Plan, the purchase option under the Lease Agreement for the partially constructed New Facility, additional construction costs to complete the New Facility and anticipated capital expenditures for machinery and equipment, furniture and fixtures, and related expenditures.
cash in our coffee-related derivative margin accounts was restricted. Changes in commodity prices and the number of coffee-related and interest swap derivative instruments held could have a significant impact on cash deposit requirements under certain of our broker and counterparty agreements and may adversely affect our liquidity.
Cash Flows
We generateThe significant captions and amounts from our condensed consolidated statements of cash from operating activities primarily from cash collections related to the sale of our products. Net cash provided by operating activities was $27.6 million in fiscal 2016 compared to $26.9 million in fiscal 2015 and $52.9 million in fiscal 2014. The higher level of net cashflows are summarized below:
|
| | | | | | | | | | | |
| | For the Years Ended June 30, |
| | 2019 | | 2018 | | 2017 |
| Condensed Consolidated Statements of cash flows data (in thousands) | | | | | |
| Net cash provided by operating activities | $ | 35,450 |
| | $ | 8,855 |
| | $ | 42,112 |
|
| Net cash used in investing activities | (32,361 | ) | | (74,640 | ) | | (106,724 | ) |
| Net cash provided by financing activities | 1,456 |
| | 61,982 |
| | 49,758 |
|
| Net increase (decrease) in cash and cash equivalents | $ | 4,545 |
| | $ | (3,803 | ) | | $ | (14,854 | ) |
Operating Activities
Cash provided by operating activities in fiscal 20162019 increased $26.6 million as compared to the prior fiscal year was2018 primarily due to, higher net incomeamong other items, improved collections on many large national accounts and a higher level ofdistributors, improved vendor terms, and reduced cash inflows from operating activities. The increase in net income was primarily duepurchases to non-cash income tax benefit resulting from the release of valuation allowance on deferred tax assets. The higher level of cash inflows from operating activities was primarily due to higher proceeds from sales of short-term investments, accruals for incentive compensation payments to eligible employees and a decrease infund inventory balances,levels. These were partially offset by a decline in revenues and higher cash outflows from increases in derivative assetsmanufacturing and accounts receivable balances, purchasessupply chain costs, higher labor and service costs associated with increased installations of short-term investmentscoffee brewing equipment, and payments forhigher restructuring and other transition expenses. Inventories decreased at the end of fiscal 2016 compared to fiscal 2015 primarily due to production consolidation, and the sale of processed and unprocessed inventories to Harris at cost upon conclusion of the transition services provided by the Company in connection with the sale of Spice Assets. At June 30, 2016, we had a net gain position in our margin accounts for coffee-related derivative instruments resulting in the release of restriction of the use of $1.0 million of cash in these accounts, which contributed to higher cash inflows in fiscal 2016. In fiscal 2015, the lower level of net cash
Cash provided by operating activities asin fiscal 2018 decreased $33.3 millionas compared to the prior fiscal year was2017 primarily due to lower net income and a higher leveluse of cash outflows from operating activities. Cash outflows were primarily from payments of accounts payable balances including the payment of expensesto fund higher inventory levels and higher payroll and benefit costs associated with the Corporate Relocation Plan, payroll expenses including accrued bonuses and restrictionBoyd Business integration, as well as slower collections of cash held in marginvarious accounts for coffee-related derivative instruments. Cash outflowsreceivables. These were partially offset by cash inflows from a decrease in inventory balances. Inventory balances decreased in fiscal 2015 compared to the prior fiscal year primarily due to the consolidationtiming of coffee production from the Torrance production facility with the Houston and Portland production facilities pursuant to our Corporate Relocation Plan. At June 30, 2015, we had a net loss position in our margin accounts for coffee-related derivative instruments resulting in restriction of the use of $1.0 million of cash in these accounts, which contributed to lower cash inflows in fiscal 2015.vendor payments.
Investing Activities
Net cash used in investing activities was $39.5during the fiscal year ended June 30, 2019 decreased $42.3 million in fiscal 2016 as compared to $20.1fiscal year ended June 30, 2018. Investment activities were elevated in the prior year period principally due to the acquisition of the Boyd Business for $39.6 million in cash. For the fiscal 2015year ended June 30, 2019 we had purchases of property, plant and $20.7equipment of $34.8 million, which included $13.7 million for machinery and equipment relating to the Northlake, Texas facility, and $21.1 million in maintenance capital expenditures. Maintenance capital expenditures included higher coffee brewing
equipment purchases compared to the prior year period due to an increased level of installations for new customers during fiscal 2014. In fiscal 2016, net2019.
Net cash used in investing activities during the fiscal year ended June 30, 2018 decreased $32.1 million as compared to fiscal year ended June 30, 2017 due primarily to the elevated levels of investments in fiscal 2017. For the fiscal year ended June 30, 2018 we invested $39.6 million for the acquisition of Boyd Business and had purchases of property, plant and equipment of $37.0 million, which included $31.1$2.5 million for machinery and equipment relating to the Northlake Texas facility, and $21.8 million in maintenance capital expenditures. Maintenance capital expenditures included higher coffee brewing equipment purchases compared to the prior year period due to an increased level of installations for new customers. In fiscal 2017, we invested $25.9 million for the acquisitions of China Mist and West Coast Coffee, $45.2 million for purchases of property, plant and equipment, including $4.4$25.9 million in machinery and equipment for the New FacilityNorthlake Texas facility, and $19.4 million in
purchases of construction-in-progress assets in connection with the construction of the New Facility as the deemed owner under the lease arrangement, partially offset by $10.9 million in proceeds from sales of assets, primarily spice assets and real estate. In fiscal 2015, net cash used in investing activities included $1.2 million in payments in connection with the RLC Acquisition and $19.2$39.8 million for purchases of property, plant and equipment, partially offset by proceeds from sales of assets primarily vehicles, of $0.3 million. The increase in cash outflows for property, plant and equipment compared to the prior fiscal year was primarily due to the capital expenditures for the New Facility as the deemed ownerconstruction of the New Facility.Northlake Texas facility.
Financing Activities
Net cash provided by financing activities in fiscal 2016 was $17.8year ended June 30, 2019 decreased $60.5 million as compared to net cash used in financing activities of $3.6 million and $22.8 million in fiscal 2015 and 2014, respectively.year ended June 30, 2018. Net cash provided by financing activities in fiscal 2016year ended June 30, 2019 included $19.4$2.2 million in proceeds from lease financingnet borrowings compared to $62.2 million in connection withnet borrowings in the constructionfiscal year ended June 30, 2018 of which $39.6 million of the New Facility as the deemed owner under the lease arrangement and $1.7 million in proceeds from stock option exercises, partially offset by $3.1 millionnet borrowings was used to pay capital lease obligations, $0.2 million in tax withholding payments related to net share settlementfund the purchase of equity awards and net repayments on our credit facility of $31,000. the Boyd Business.
Net cash used inprovided by financing activities in fiscal 2015year ended June 30, 2018 increased $12.2 million as compared to fiscal year ended June 30, 2017. Net cash provided by financing activities in fiscal year ended June 30, 2018 included $3.9 million used to pay capital lease obligations, $0.6$62.2 million in net repayments on our credit facility, $0.6borrowings compared to $27.5 million in deferred financing costs for the Revolving Facility and $0.1 millionnet borrowings in tax withholding payments related to net share settlement of equity awards, partially offset by $1.5 million in proceeds from stock option exercises. Net repayments on our credit facility in fiscal 2014 were $20.6 million.
Sale of Spice Assets
In order to focus on our core product offerings, in the second quarter of fiscal 2016, we completed the sale of certain assets associated with our manufacture, processing and distribution of raw, processed and blended spices and certain other culinary products to Harris. We received $6.0 million in cash at closing, and we are eligible to receive an earnout amount of up to $5.0 million over a three year period based upon a percentage of certain institutional spice sales by Harris following the closing. The sale of the Spice Assets does not represent a strategic shift for us and is not expected to have a material impact on our results of operations because we will continue to sell a complete portfolio of spice and other culinary products purchased from Harris under a supply agreement to our DSD customers. See Note 5, Sale of Spice Assets, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Sale of Torrance Facility
In the fourth quarter of fiscal 2016, we entered into a purchase and sale agreement to sell the Torrance facility. Subsequent to the fiscal year end, the sale of the Torrance facility closed on July 15, 2016 for an aggregate cash sale price of $43.0 million (which sale price was subject to customary adjustments for closing costs and documentary transfer taxes). We have agreed to lease back the Torrance facility on a triple net basis through October 31, 2016 at zero base rent, subject to two one-month extensions at our option at a base rent of $100,000 per month. As ofended June 30, 2016, the Torrance facility continued to house certain administrative functions and serve as a distribution facility and branch warehouse pending transition of the remaining Torrance operations to our other facilities. See Note 6, Assets Held for Sale, and Note 24, Subsequent Events, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Torrance Facility Exit Costs
Based on current assumptions and subject to continued implementation of the Corporate Relocation Plan, we estimate that we will incur approximately $31 million in cash costs in connection with the exit of the Torrance facility consisting of $18 million in employee retention and separation benefits, $5 million in facility-related costs and $8 million in other related costs. Since adoption of the Corporate Relocation Plan in2017. In fiscal 2015 throughyear ended June 30, 2016, we have recognized a total of $25.72018, $39.6 million of the estimated $31 million in aggregate cash costs, including $16.2 million in employee retention and separation benefits, $3.1 million in facility-related costs relatednet borrowings was used to fund the relocation of our Torrance operations and certain distribution operations and $6.4 million in other related costs recorded in “Restructuring and other transition expenses” in our consolidated statements of operations. The remainder is expected to be recognized in the first half of fiscal 2017. Additionally, we recognized from inception through fiscal 2016 $1.3 million in non-cash depreciation expense associated with the Torrance production facility. We may incur certain other non-cash asset impairment costs and pension-related costs in connection with the Corporate Relocation Plan. See Note 3, Corporate Relocation Plan,purchase of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Boyd Business.
New Facility Construction Costs
In the first quarter of fiscal 2016, we entered into the Lease Agreement for the New Facility pursuant to which the New Facility is being constructed by the lessor, at its expense, in accordance with agreed upon specifications and plans. Based on the final budget, which reflects substantial completion of the principal design work for the New Facility, we estimate that the construction costs for the New Facility will be approximately $55 million to $60 million.
In the fourth quarter of fiscal 2016 we exercised the purchase option under the Lease Agreement to acquire the partially constructed New Facility with a targeted closing date in the first quarter of fiscal 2017. The estimated purchase option exercise price for the New Facility is $58.8 million based on the budget for the completed facility. The actual option exercise price for the partially constructed New Facility will depend upon, among other things, the timing of the closing and the actual costs incurred for construction of the New Facility as of the purchase option closing date. See Note 4, New Facility Lease Obligation, and Note 22, Contractual Obligations, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.We recorded an asset related to the New Facility lease obligation included in property, plant and equipment of $28.1 million at June 30, 2016, as the deemed owner of the New Facility, and an offsetting liability of $28.1 million for the lease obligation in "Other long-term liabilities" on our consolidated balance sheet at June 30, 2016. There were no such amounts recorded at June 30, 2015.
Capital Expenditures
For the fiscal years ended June 30, 2016, 2015 and 2014, our capital expenditures were as follows:
|
| | | | | | | | | | | | |
| | | | | June 30, | | |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Coffee brewing equipment | | $ | 8,375 |
| | $ | 10,709 |
| | $ | 13,550 |
|
| Vehicles, machinery and equipment | | 10,254 |
| | 6,079 |
| | 9,270 |
|
| Building and facilities | | 3,354 |
| | 1,460 |
| | 758 |
|
| Software, office furniture and equipment | | 3,165 |
| | 946 |
| | 1,689 |
|
| Land | | 1,458 |
| | — |
| | — |
|
| Capital expenditures, excluding New Facility | | $ | 26,606 |
| | $ | 19,194 |
| | $ | 25,267 |
|
| New Facility: | | | | | | |
| Machinery and equipment | | $ | 4,443 |
| | $ | 22 |
| | $ | — |
|
| Total capital expenditures | | $ | 31,049 |
| | $ | 19,216 |
| | $ | 25,267 |
|
We expect to incur approximately $35 million to $39 million in anticipated capital expenditures for machinery and equipment, furniture and fixtures, and related expenditures associated with the New Facility. As of June 30, 2016, we had spent $4.4 million towards the purchase of machinery and equipment for the New Facility. No such capital expenditures were incurred in fiscal 2015. The majority of the capital expenditures associated with machinery and equipment, furniture and fixtures and related expenditures for the New Facility are expected to be incurred in the first half of fiscal 2017.
Our expected capital expenditures for fiscal 2017 unrelated to the New Facility include expenditures to replace normal wear and tear of coffee brewing equipment, vehicles, machinery and equipment and mobile sales solution hardware, and are expected to be consistent with the average capital expenditures for the past three fiscal years.
Working Capital
At June 30, 2016 and 2015, our working capital was composed of the following:
|
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2016 | | 2015 |
| Current assets(1) | | $ | 153,365 |
| | $ | 135,685 |
|
| Current liabilities(2) | | 56,837 |
| | 64,874 |
|
| Working capital | | $ | 96,528 |
| | $ | 70,811 |
|
__________
(1) Includes $4.0 million in coffee-related short-term derivative assets and $7.2 million in assets held for sale at June 30, 2016 and $1.0 million in restricted cash at June 30, 2015.
(2) Includes $4.0 million in coffee-related short-term derivative liabilities and $1.4 million in deferred tax liabilities at June 30, 2015.
Contractual Obligations
The following table contains information regarding total contractual obligations as of June 30, 2016, including capital leases:2019:
| | | | | Payment due by period | | Payment due by period |
| (In thousands) | | Total | | Less Than One Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years | | Total | | Less Than One Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| Contractual obligations: | | | | | | | | | | | | | | | | | | | | |
| Operating lease obligations | | $ | 11,801 |
| | $ | 4,093 |
| | $ | 5,927 |
| | $ | 1,720 |
| | $ | 61 |
| | $ | 18,689 |
| | $ | 4,434 |
| | $ | 5,710 |
| | $ | 4,156 |
| | $ | 4,389 |
|
| New Facility purchase option exercise price(1) | | 58,779 |
| | 58,779 |
| | — |
| | — |
| | — |
| |
| Capital lease obligations(2) | | 2,504 |
| | 1,443 |
| | 1,005 |
| | 56 |
| | — |
| |
| Pension plan obligations | | 89,950 |
| | 8,075 |
| | 16,858 |
| | 17,918 |
| | 47,099 |
| |
Postretirement benefits other than pension plans | | 11,957 |
| | 1,080 |
| | 2,245 |
| | 2,386 |
| | 6,246 |
| |
| Capital lease obligations(1) | | | 37 |
| | 36 |
| | 1 |
| | — |
| | — |
|
| Pension plan obligations(2) | | | 71,400 |
| | 6,850 |
| | 13,630 |
| | 14,370 |
| | 36,550 |
|
Postretirement benefits other than pension plans(2) | | | 12,982 |
| | 1,087 |
| | 2,311 |
| | 2,468 |
| | 7,116 |
|
| Revolving credit facility | | 109 |
| | 109 |
| | — |
| | — |
| | — |
| | 92,000 |
| | — |
| | — |
| | 92,000 |
| | — |
|
| Purchase commitments(3) | | 72,217 |
| | 72,217 |
| | — |
| | — |
| | — |
| | 61,244 |
| | 61,244 |
| | — |
| | — |
| | — |
|
| Derivative liabilities—noncurrent | | | 1,612 |
| | — |
| | 1,612 |
| | — |
| | — |
|
| Cumulative Preferred dividends, undeclared and unpaid-non-current | | | 924 |
| | — |
| | 924 |
| | — |
| | — |
|
| Total contractual obligations | | $ | 247,317 |
| | $ | 145,796 |
| | $ | 26,035 |
| | $ | 22,080 |
| | $ | 53,406 |
| | $ | 258,888 |
| | $ | 73,651 |
| | $ | 24,188 |
| | $ | 112,994 |
| | $ | 48,055 |
|
______________
| |
| (1) | Includes imputed interest of $2,000. |
(1) In the fourth quarter of fiscal 2016, we exercised the purchase option under the Lease Agreement to acquire the partially constructed New Facility with a targeted closing date in the first quarter of fiscal 2017. The purchase option exercise price shown in the table above is an estimate based on the budget for the completed facility. The actual option exercise price for the partially constructed New Facility will depend upon, among other things, the timing of the closing and the actual costs incurred for construction of the New Facility as of the purchase option closing date.(2) See Note 413, New Facility Lease ObligationEmployee Benefit Plans,, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.Annual Report on Form 10‑K.(2) Includes imputed interest of $0.1 million.
(3) Purchase commitments include commitments under coffee purchase contracts for which all delivery terms have been finalized but the related coffee has not been received as of June 30, 2016.2019. Amounts shown in the table above: (a) include all coffee purchase contracts that the Company considers to be from normal purchases; and (b) do not include amounts related to derivative instruments that are recorded at fair value on the Company’s consolidated balance sheets.
As of June 30, 2016, we had committed to purchase green coffee inventory totaling $62.5 million under fixed-price contracts, $3.3 million in equipment for the New Facility and $6.3 million in other inventory under non-cancelable purchase orders.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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 GAAP. Our significant accounting policies are discussed in See Note 122, Summary of Significant Accounting Policies,Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10‑K
Capital Expenditures
For the fiscal years ended June 30, 2019, 2018 and 2017, our capital expenditures paid were as follows:
|
| | | | | | | | | | | | |
| | | June 30, |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Maintenance: | | | | | | |
| Coffee brewing equipment | | $ | 14,925 |
| | $ | 12,067 |
| | $ | 10,758 |
|
| Building and facilities | | 106 |
| | 542 |
| | 345 |
|
| Vehicles, machinery and equipment | | 2,787 |
| | 5,513 |
| | 7,445 |
|
| Software, office furniture and equipment | | 3,270 |
| | 3,660 |
| | 698 |
|
| Capital expenditures, maintenance | | $ | 21,088 |
| | $ | 21,782 |
| | $ | 19,246 |
|
| | | | | | | |
| Expansion Project: | | | | | | |
| Machinery and equipment | | $ | 13,671 |
| | $ | 10,746 |
| | $ | — |
|
| Capital expenditures, Expansion Project | | $ | 13,671 |
| | $ | 10,746 |
| | $ | — |
|
| | | | | | | |
| New Facility Costs: | | | | | | |
| Building and facilities, including land | | $ | — |
| | $ | 1,577 |
| | $ | 39,754 |
|
| Machinery and equipment | | — |
| | 2,489 |
| | 20,089 |
|
| Software, office furniture and equipment | | — |
| | 426 |
| | 5,860 |
|
| Capital expenditures, New Facility | | $ | — |
| | $ | 4,492 |
| | $ | 65,703 |
|
| Total capital expenditures | | $ | 34,759 |
| | $ | 37,020 |
| | $ | 84,949 |
|
In fiscal 2020, we anticipate maintenance capital expenditures will be between $17 million to $20 million. We expect to finance these expenditures through cash flows from operations and borrowings under our New Revolving Facility.
Depreciation and amortization expense was $31.1 million, $30.5 million and $23.0 million in fiscal 2019, 2018 and 2017, respectively. We anticipate our depreciation and amortization expense will be approximately $7.5 million to $7.8 million per quarter in fiscal 2020 based on our existing fixed assets and the useful lives of our intangible assets.
Acquisitions
On October 2, 2017, we acquired substantially all of the assets and certain specified liabilities of Boyd Coffee. At closing, for consideration of the purchase, we paid Boyd Coffee $38.9 million in cash from borrowings under our Revolving Facility and issued to Boyd Coffee 14,700 shares of Series A Preferred Stock, with a fair value of $11.8 million as of the closing date. Additionally, we held back $3.2 million in cash and 6,300 shares of Series A Preferred Stock, with a fair value of $4.8 million as of the closing date, for the satisfaction of any post-closing net working capital adjustment and to secure Boyd Coffee’s (and the other seller parties’) indemnification obligations under the purchase agreement.
In addition to the $3.2 million cash holdback, as part of the consideration for the purchase, at closing we held back $1.1 million in cash to pay, on behalf of Boyd Coffee, any assessment of withdrawal liability made against Boyd Coffee following the closing date in respect of Boyd Coffee’s multiemployer pension plan, which amount is recorded in other long-term liabilities on our consolidated balance sheet at June 30, 2018. On January 8, 2019, Boyd Coffee notified the Company of the assessment of $0.5 million in withdrawal liability against Boyd Coffee, which the Company timely paid from the Multiemployer Plan Holdback during the three months ended March 31, 2019. The Company has applied the remaining amount of the Multiemployer Plan Holdback of $0.5 million towards satisfaction of the Seller’s post-closing net working capital deficiency under the Asset Purchase Agreement as of March 31, 2019.
The fair value of consideration transferred reflected the Company’s best estimate of the post-closing net working capital adjustment of $8.1 million due to the Company at June 30, 2018 when the purchase price allocation was finalized. In January
2019, the post-closing net working capital adjustment was determined by an Independent Expert to be $6.3 million due to the Company.
As of March 31, 2019, we have satisfied the $6.3 million amount by applying the remaining amount of the Multiemployer Plan Holdback of $0.5 million, retaining all of the Holdback Cash Amount of $3.2 million and canceling 4,630 shares of Holdback Stock with a fair value of $2.3 million based on the stated value and deemed conversion price as defined in the asset purchase agreement. We have retained the remaining 1,670 shares of the Holdback Stock pending satisfaction of certain indemnification claims against the Seller following which the remaining Holdback Stock, if any, will be released to the Seller.
See Note 3, Acquisitions, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report. report for further details of the acquisitions. DSD Restructuring Plan
On February 21, 2017, we announced the DSD Restructuring Plan. We have revised our estimated time of completion of the DSD Restructuring Plan from the end of calendar 2018 to the end of fiscal 2019. We recognized approximately $4.5 million of pre-tax restructuring charges in connection with the DSD Restructuring Plan by the end of fiscal 2019 consisting of approximately $2.3 million in employee-related costs and contractual termination payments, including severance, prorated bonuses for bonus eligible employees and outplacement services, and $2.2 million in other related costs, including legal, recruiting, consulting, other professional services, and travel. We have completed the DSD Restructuring Plan as of June 30, 2019.
The preparationfollowing table sets forth the expenses associated with the DSD Restructuring Plan for the fiscal years ended June 30, 2019, 2018 and 2017:
|
| | | | | | | | | | | |
| | Year Ended June 30, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| Employee-related costs | $ | 1,487 |
| | $ | 612 |
| | $ | 506 |
|
| Other | 284 |
| | 429 |
| | 1,205 |
|
| Total | $ | 1,771 |
| | $ | 1,041 |
| | $ | 1,711 |
|
Recent Accounting Pronouncements
Refer to Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report for a summary of recently adopted and recently issued accounting standards and their related effects or anticipated effects on our consolidated results of operations and financial condition. Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in accordance with GAAP. In applying many of these financial statements requires usaccounting principles, we need to make assumptions, estimates or 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 evaluatein our estimates, including those related to inventory valuation, including LIFO reserves, valuation of intangible assets, deferred tax assets, liabilities relating to retirement benefits, liabilities resulting from self-insurance, tax liabilities and litigation.consolidated financial statements. We base our estimates judgments and assumptionsjudgments on historical experience and other relevant factorsassumptions that are believed to be reasonable based on information available to us at the time these estimates are made.
While we believe thatare reasonable under the historical experiencecircumstances. These assumptions, estimates or judgments, however, are both subjective and other factors considered provide a meaningful basis for the accounting policies applied in the preparation of the consolidated financial statements,subject to change, and actual results may differ from theseour assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which could require us to make adjustments to these estimates in future periods.
the actual amounts become known. 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 thesefollowing critical accounting policies
andcould potentially produce materially different results if we were to change the underlying assumptions, estimates
and their related disclosureor judgments. See Note 2, Summary of Significant Accounting Policies,of the Notes to Consolidated Financial Statements included in this report, with the Audit CommitteeAnnual Report on Form 10‑K for a summary of our Board of Directors.significant accounting estimates. Exposure to Commodity Price Fluctuations and Derivative Instruments
We are exposed to commodity price risk arising from changes in the market price of green coffee. In general, increases in the price of green coffee could cause our cost of goods sold to increase and, if not offset by product price increases, could negatively affect our financial condition and results of operations. As a result, our business model strives to reduce the impact of green coffee price fluctuations on our financial results and to protect and stabilize our margins, principally through customer arrangements and derivative instruments.
Customers generally pay for our products based either on an announced price schedule or under commodity-based pricing arrangements whereby the changes in green coffee commodity and other input costs are passed through to the customer. The pricing schedule is generally subject to adjustment, either on contractual terms or in accordance with periodic product price adjustments, typically monthly, resulting in, at the least, a 30-day lag in our ability to correlate the changes in our prices with fluctuations in the cost of raw materials and other inputs.
In addition to our customer arrangements, we utilize derivative instruments to reduce further the impact of changing green coffee commodity prices. We purchase over-the-counter coffee derivative instruments to enable us to lock in the price of green coffee commodity purchases. These derivative instruments may be entered into at the direction of the customer under commodity-based pricing arrangements to effectively lock in the purchase price of green coffee under such customer arrangements, in certain cases up to 18 months or longer in the future. Notwithstanding this customer direction, pursuant to Accounting Standards Codification ("ASC"(“ASC“) 815, “Derivatives and Hedging,” we are considered the owner of these derivative instruments and, therefore, we are required to account for them as such. In the event the customer fails to purchase the products associated with the underlying derivative instruments for which the price has been locked-in on behalf of the customer, we expect that such derivative instruments will be assigned to, and assumed by, the customer in accordance with contractual terms or, in the absence of such terms, in accordance with standard industry custom and practice. In the event the customer fails to assume such derivative instruments, we will remain obligated on the derivative instruments at settlement. We generally settle derivative instruments to coincide with the receipt of the purchased green coffee or apply the derivative instruments to purchase orders effectively fixing the cost of in-bound green coffee purchases. As of June 30, 20162019 and 2015,2018, we had 34.048.2 million and 34.243.5 million pounds of green coffee covered under coffee-related derivative instruments,
respectively. We do not purchase any derivative instruments to hedge cost fluctuations of any commodities other than green coffee.
The fair value of derivative instruments is based upon broker quotes. We account for certain coffee-related derivative instruments as accounting hedges in order to minimize the volatility created in our quarterly results from utilizing these derivative contracts and to improve comparability between reporting periods. The effective portion of the change in fair value of the derivative is reported in accumulated other comprehensive income (loss) (“AOCI”) on our consolidated balance sheet and subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. At June 30, 2016,2019, approximately 96%87% of our outstanding coffee-related derivative instruments, representing 32.642.1 million pounds of forecasted green coffee purchases, were designated as cash flow hedges. At June 30, 2015,2018, approximately 94% of our outstanding coffee-related derivative instruments, representing 32.340.9 million pounds of forecasted green coffee purchases, were designated as cash flow hedges. The portion of open hedging contracts that are not 100% effective as cash flow hedges and those that are not designated as accounting hedges are marked to period-end market price and unrealized gains or losses based on whether the period-end market price was higher or lower than the price we locked-in are recognized in our financial results.
Our risk management practices reduce but do not eliminate our exposure to changing green coffee prices. While
Additionally, we have limitedinterest swap rate derivative instruments on our exposure to unfavorable green coffee price changes, we have also limited our ability to benefit from favorable price changes. Further, our counterparty may require that we post cash collateral ifdebt facility. Therefore, movement in the fair value of our derivative liabilities exceedunderlying yield curves could negatively impact the amount of credit granted by such counterparty, thereby reducing our liquidity. At June 30, 2016, because we had a net gain position in our coffee-related derivative margin accounts, none of theinterest expense, future earnings and cash in these accounts was restricted. At June 30, 2015, we had $1.0 million in restricted cash representing cash held on deposit in margin accounts for coffee-related derivative instruments due to a net loss position in such accounts. Changes in commodity prices and the number of coffee-related derivative instruments held could have a significant impact on cash deposit requirements under our broker and counterparty agreements.flows.
Inventories
Inventories are valued at the lower of cost or market. We accountnet realizable value. Effective June 30, 2018, we changed our method of accounting for coffee, tea and culinary products onfrom the last in, first out (“LIFO”)LIFO basis and coffeeto the FIFO basis. All prior periods have been retrospectively adjusted for this change. Coffee brewing equipment parts continue to be accounted for on the first in, first out (“FIFO”)FIFO basis. We regularly evaluate these inventories to determine inventory reservesthe provision for obsolete and slow-moving inventory. Inventory reserves are based on inventory obsolescence trends, historical experience and application of specific identification. At the end of each quarter, we record the expected effect of the liquidation of LIFO inventory quantities, if any, 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. As these estimates are subject to many forces beyond management's control, interim results are subject to the final fiscal year-end LIFO inventory valuation.
Impairment of Goodwill and Indefinite-lived Intangible Assets
We account for our goodwill and indefinite-lived intangible assets in accordance with ASCAccounting Standards Codification (“ASC”) 350, “Intangibles-Goodwill and Other” (“ASC 350”). Goodwill and other indefinite-lived intangible assets are not amortized but instead are reviewed for impairment annually, or more frequently if an event occurs or circumstances change which indicate that an asset might be impaired. We perform a qualitative assessment of goodwill and indefinite-lived intangible assets on our consolidated balance sheets, to determine if there is a more likely than not indication that our goodwill and indefinite-lived intangible assets are impaired as of June 30.January 31. If the indicators of impairment are present, we perform a quantitative test to determine the impairment of these assets as of the measurement date.
Testing for impairment of goodwill If, after assessing qualitative and quantitative factors, we believe that it is a two-step process. The first step requires us to comparemore likely than not that the fair value of our reporting unit to the carrying value of the reporting unit, including goodwill. If the fair value of a reporting unit is less than its carrying value, goodwill ofwe will record 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 valueamount of goodwill which isand indefinite-lived intangible assets impairment as the residual fair value remaining after deducting the fair valueexcess 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 toover the difference.
fair value. Indefinite-lived intangible assets are tested for impairment by comparing their fair values to their carrying values. An impairment charge is recorded if the estimated fair valueconsist of such assets has decreased below their carrying value.certain acquired trademarks, trade names and brand name.
Other Intangible Assets
Other intangible assets consist of finite-lived intangible assets including acquired recipes, non-compete agreements, customer relationships, a trade name/brand name and customer relationships.certain trademarks. These assets are amortized over their estimated useful lives and are tested for impairment by grouping them with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance and may differ from actual cash flows. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. 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.
Self-Insurance
We use a combination of insurance and self-insurance mechanisms including the use of captive insurance entities and participation in a reinsurance treaty, to provide for the potential liability of certain risks including workers’ compensation, health care benefits, general liability, product liability, property insurance and director and officers’ liability insurance. Liabilities associated with risks retained by us are not discounted and are estimated by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions.
Our self-insurance for workers’ compensation liability includes estimated outstanding losses of unpaid claims and allocated loss adjustment expenses (“ALAE”), case reserves, the development of known claims and incurred but not reported claims. ALAE are the direct expenses for settling specific claims. The amounts reflect per occurrence and annual aggregate limits maintained by the Company. The estimated liability analysis does not include estimating a provision for unallocated loss adjustment expenses. We believe that the amount recorded at June 30, 20162019 is adequate to cover all known workers' compensation claims at June 30, 2016.2019. 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 our operating results.
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. GeneralThe cost of general liability, product liability and commercial auto liability are insured through a captive insurance program. We retain the risk within certain aggregate amounts. Cost of the insurance through the captive program is accrued based on estimates of the aggregate liability claims incurred using certain actuarial assumptions and historical claims experience.
Employee Benefit Plans
We provide benefit plansaccount for most full-time employees, including 401(k), health and other welfare benefit plans and, in certain circumstances, pension benefits. Generally the plans provide benefits based on years of service and/or a combination of years of service and earnings. In addition, we contribute to two multiemployerour defined benefit pension plans one multiemployer defined contribution pension plan and ten multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. In addition, we sponsor a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees and provides retiree medical coverage and, depending on the age of the retiree, dental and vision coverage. We also provide a postretirement death benefit to certain of our employees and retirees.
We are required to recognize thein accordance with ASC No. 715-20, “Compensation—Defined Benefit Plans—General” (“ASC 715-20”). The funded status of a benefit plan in our consolidated balance sheet. We are also required to recognize in OCI certain gains and losses that arise duringis the period but are deferred under pension accounting rules.
Single Employer Pension Plans
We have a defined benefit pension plan, the Farmer Bros. Co. Pension Plan for Salaried Employees (the “Farmer Bros. Plan”), for our employees hired prior to January 1, 2010 who are not covered under a collective bargaining agreement. 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 Farmer Bros. Plan, and new hires are not eligible to participate in the Farmer Bros. Plan. As all plan participants became inactive following this pension 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.
We also have two defined benefit pension plans for certain hourly employees covered under collective bargaining agreements (the “Brewmatic Plan” and the “Hourly Employees’ Plan”).
We obtain actuarial valuations for our single employer defined benefit pension plans. In fiscal 2016 we discounted the pension obligations using a 4.40% discount rate and 7.50% expected long-term rate of 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, 2016, the projected benefit obligation under our single employer defined benefit pension plans was $161.2 million anddifference between the fair value of plan assets was $96.6 million.and the benefit obligation. The difference betweenadjustment to accumulated other comprehensive Income (loss) represents the net unrecognized actuarial gains or losses and unrecognized prior service costs. Future actuarial gains or losses that are not recognized as net periodic benefits cost in the same periods will be recognized as a component of other comprehensive income.
We maintain several defined benefit plans that cover certain employees. We record the expenses associated with these plans based on calculations which include various actuarial assumptions such as discount rates and expected long-term rates of return on plan assets. Material changes in pension costs may occur in the future due to changes in these assumptions. Future annual amounts could be impacted by changes in the discount rate, changes in the expected long-term rate of return, changes in the level of contributions to the plans and other factors.
We utilize a yield curve analysis to determine the discount rates for our defined benefit plans’ obligations. The yield curve considers pricing and yield information for high quality bonds with maturities matched to estimated payouts of future pension benefits. The expected return on plan assets is based on our expectation of the long-term rates of return on each asset class based on the current asset mix of the funds, considering the historical returns earned on the type of assets in the funds. We review our actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when appropriate. The effects of the modifications to the actuarial assumptions which impact the projected benefit obligation and the fair value of plan assets is recognized asare amortized over future periods.
In connection with certain collective bargaining agreements to which we are a decrease in 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 cost and ongoing funding requirements of those plans. Among other factors, changes in interest rates, mortality rates, early retirement rates, mix of plan asset investments, investment returns and the market value of plan assets can affect the level of plan funding, cause volatility in the net periodic benefit cost, increase our future funding requirements and require premium payments to the Pension Benefit Guaranty Corporation. For the fiscal year ended June 30, 2016,party, we made $1.6 million in contributions to our single employer defined benefit pension plans and recorded pension expense of $1.2 million. We expect to make approximately $2.3 million in contributions to our single employer defined benefit pension plans in fiscal 2017 and accrue pension expense of approximately $1.7 million per year beginning in fiscal 2017. These pension contributions are expected to continue at this level for several years; however a deterioration in the current economic environment would increase the risk that we may be required to make larger contributions in the future.
The following chart quantifies the effect on the projected benefit obligation and the net periodic benefit cost of a change in the discount rate assumption and the impact on the net periodic benefit cost of a change in the assumed rate of return on plan assets under our single employer defined benefit pension plans for fiscal 2017:
|
| | | | | | | | | | | | |
| ($ in thousands) | | | | | | |
| Farmer Bros. Plan Discount Rate | | 3.1% | | Actual 3.55% | | 4.1% |
| Net periodic benefit cost | | $ | 983 |
| | $ | 1,086 |
| | $ | 1,159 |
|
| Projected benefit obligation | | $ | 162,790 |
| | $ | 152,324 |
| | $ | 142,921 |
|
| | | | | | | |
| Farmer Bros. Plan Rate of Return | | 7.3% | | Actual 7.75% | | 8.3% |
| Net periodic benefit cost | | $ | 1,529 |
| | $ | 1,086 |
| | $ | 642 |
|
| | | | | | | |
| Brewmatic Plan Discount Rate | | 3.1% | | Actual 3.55% | | 4.1% |
| Net periodic benefit cost | | $ | 68 |
| | $ | 71 |
| | $ | 73 |
|
| Projected benefit obligation | | $ | 4,856 |
| | $ | 4,575 |
| | $ | 4,327 |
|
| | | | | | | |
| Brewmatic Plan Rate of Return | | 7.3% | | Actual 7.75% | | 8.3% |
| Net periodic benefit cost | | $ | 85 |
| | $ | 71 |
| | $ | 56 |
|
| | | | | | | |
| Hourly Employees’ Plan Discount Rate | | 3.1% | | Actual 3.55% | | 4.1% |
| Net periodic benefit cost | | $ | 606 |
| | $ | 530 |
| | $ | 462 |
|
| Projected benefit obligation | | $ | 4,725 |
| | $ | 4,329 |
| | $ | 3,980 |
|
| | | | | | | |
| Hourly Employees' Plan Rate of Return | | 7.3% | | Actual 7.75% | | 8.3% |
| Net periodic benefit cost | | $ | 543 |
| | $ | 530 |
| | $ | 517 |
|
Multiemployer Pension Plans
We participate in two multiemployer defined benefit pension plans that are union sponsored and collectively bargained for the benefitbehalf of certain union employees subject to collective bargaining agreements. We makemultiemployer pension plans. The future contributions toand liabilities associated with these plans generally based on the numbercould be material to our results of hours worked by the participants in accordance with the provisions of negotiated labor contracts.operations, financial position and cash flows.
The risks of participating in multiemployer pension plans are different from single-employer plans in that: (i) assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligationsSee Note 13, Employee Benefit Plans, of the plan may be borne by the remaining participating employers; and (iii) if we stop participatingNotes to Consolidated Financial Statements included in the multiemployer plan, we may be required to pay the plan an amount basedthis Annual Report on the underfunded status of the plan, referred to as a withdrawal liability.Postretirement Benefits
We sponsor a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees. The plan provides medical, dental and vision coverageForm 10‑K for retirees under age 65 and medical coverage only for retirees age 65 and above. 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, subject to a maximum monthly Company contribution. Our retiree medical, dental and vision plan is unfunded, and its liability was calculated using an assumed discount rate of 3.7% at June 30, 2016. We project an initial medical trend rate of 9.0% in fiscal 2016, ultimately reducing to 4.5% in 10 years.
We also provide a postretirement death benefit to certainfurther discussions of our employees and retirees, subject, in the case of current employees, to continued employment with the Company until retirement, and certain other conditions related to the manner of employment termination and manner of death. We record the actuarially determined liability for the present value of the postretirement death benefit using a discount rate of 3.8%. We have purchased life insurance policies to fund the
postretirement death benefit wherein we own the policy but the postretirement death benefit is paid to the employee's or retiree's beneficiary. We record an asset for the fair value of the life insurance policies which equates to the cash surrender value of the policies.various pension plans.
Share-based Compensation
We measure all share-based compensation cost at the grant date, based on the fair values of the awards that are ultimately expected to vest, and recognize that cost on a straight line basis in our consolidated statements of operations over the requisite service period. Fair value of restricted stock and performance-based restricted stock units is the closing price of the Company's common stock on the date of grant. We estimate the fair value of stock option awards on the date of grant using the Black-Scholes valuation model which requires that we make certain assumptions regarding: (i) the expected volatility in the market price of our common stock; (ii) dividend yield; (iii) risk-free interest rate; and (iv) the period of time employees are expected to hold the award prior to exercise (referred to as the expected term).
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because our 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 of the fair value of our stock options. Although the 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.
In addition, weWe estimate the expected impact of forfeited awards and recognize share-based compensation cost only for those awards ultimately 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 materially in the future. In each of fiscal 20162019 and 2015,2018, we used an estimated annual forfeiture rate of 13.0% and 4.8%, respectively to calculate share-based compensation expense based on actual forfeiture experience.
We haveOur outstanding share-based awards include performance-based non-qualified stock options (“PNQs”) and performance-based restricted stock units (“PBRSUs”) that have performance-based vesting conditions in addition to time-based vesting. Awards with performance-based vesting conditions require the achievement of certain financial and other performance criteria as a condition to the vesting. We recognize the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the performance period based upon our determination of whether it is probable that the performance targets will be achieved. At each reporting period, we reassess the probability of achieving the performance criteria and the performance period required to meet those targets. Determining whether the performance criteria will be achieved involves judgment, and the estimate of share-based compensation expense may be revised periodically based on changes in the probability of achieving the performance criteria. Revisions are reflected in the period in which the estimate is changed. If
performance goals are not met, no share-based compensation expense is recognized for the cancelled PNQs or PBRSUs, and, to the extent share-based compensation expense was previously recognized for those cancelled PNQs or PBRSUs, such share-based compensation expense is reversed. If performance goals are exceeded and the payout is more than 100% of the target shares in the case of PBRSUs, additional compensation expense is recorded in the period when that determination is certified by the Compensation Committee of the Board of Directors.
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 the 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 re-evaluate 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 evaluate our deferred tax assets quarterly to determine if a valuation allowance is required. We consider whether a valuation allowance should be recorded against deferred tax assets based on the likelihood that the benefits of the deferred tax assets will or will not ultimately be realized in future periods. In making this assessment, significant weight is given to evidence that can be objectively verified, such as recent operating results, and less consideration is given to less objective indicators, such as future income projections. After consideration of positive and negative evidence, including the recent history of income, we concluded that it is more likely than not that we will generate future income sufficient to realize our the majority of our deferred tax assets as of June 30, 2016. Accordingly, we recorded a reduction in our valuation allowance in fiscal 2016 in the amount of $83.2 million.
|
| |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
We arehistorically have been 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 derivative instruments 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 contractsfor which we entered, from time 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 oftime, futures and options contracts, or invested in derivative instruments, to manage our interest rate risk. Effective March 27, 2019, we entered into depends on, among other items, the specifican interest rate swap transaction utilizing a notional amount of $80.0 million, with an effective date of April 11, 2019 and a maturity and issuer redemption provisions for each preferred stock held, the slopedate of October 11, 2023. See Note 6, Derivative Instruments, of the U.S. Treasury yield curve, the expected volatility of U.S. Treasury yields, and the costs of using futures and/or options. The following table demonstrates the impact of varying interest rate changes basedNotes to Consolidated Financial Statements included in this Annual Report on our preferred securities holdings and market yield and price relationships at June 30, 2016. This table is predicated on an “instantaneous” change in the general level of interest rates and assumes predictable relationships between the pricesForm 10‑K for further discussions of our preferred securities holdings and the yields on U.S. Treasury securities. At June 30, 2016, we had no futures contracts or put options with respect to our preferred securities portfolio designated as interest rate risk hedges.derivative instruments. |
| | | | | | | | |
| ($ in thousands) | | Market Value of Preferred Securities at June 30, 2016 | | Change in Market Value |
| Interest Rate Changes | | |
| –150 basis points | | $ | 26,495 |
| | $ | 904 |
|
| –100 basis points | | $ | 26,310 |
| | $ | 719 |
|
| Unchanged | | $ | 25,591 |
| | $ | — |
|
| +100 basis points | | $ | 24,644 |
| | $ | (947 | ) |
| +150 basis points | | $ | 24,184 |
| | $ | (1,407 | ) |
Borrowings under our Revolving Facility bear interest based on average historical excess availability levelsa leverage grid with a range of PRIME -+ 0.25% to PRIME + 0.50%0.875% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%1.875%.
At June 30, 2016,2019, we were eligible to borrow up to a total of $150.0 million under the Revolving Facility and had outstanding borrowings of $0.1$92.0 million and had utilized $11.9$2.3 million of the letters of credit sublimit, and had excess availability undersublimit. As a result of the Revolving Facility of $46.6 million.interest rate swap, only $12.0 million is now subject to interest rate variability. The weighted average interest rate on our outstanding borrowings subject to interest rate variability under the Revolving Facility at June 30, 20162019 was 1.64%3.98%.
The following table demonstrates the impact of interest rate changes on our annual interest expense on outstanding borrowings subject to interest rate variability under the Revolving Facility based on the weighted average interest rate on the outstanding borrowings as of June 30, 2019:
|
| | | | | | | | | |
| ($ in thousands) | | Principal | | Interest Rate | | Annual Interest Expense |
| –150 basis points | | $12,000 | | 2.48 | % | | $ | 298 |
|
| –100 basis points | | $12,000 | | 2.98 | % | | $ | 358 |
|
| Unchanged | | $12,000 | | 3.98 | % | | $ | 478 |
|
| +100 basis points | | $12,000 | | 4.98 | % | | $ | 598 |
|
| +150 basis points | | $12,000 | | 5.48 | % | | $ | 658 |
|
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 LIFOFIFO 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 purchase over-the-counter coffee derivative instruments to enable us to lock in the price of green coffee commodity purchases. These derivative instruments also may be entered into at the direction See Note 6, Derivative Instruments, of the customer under commodity-based pricing arrangementsNotes to effectively lockConsolidated Financial Statements included in the purchase price of green coffee under such customer arrangements, in certain cases up to 18 months or longer in the future. We accountthis Annual Report on Form 10‑K for certain coffee-related derivative instruments as accounting hedges in order to minimize the volatility created in our quarterly results from utilizing these derivative contracts and to improve comparability between reporting periods.When we designate coffee-related derivative instruments as cash flow hedges, we formally document the hedging instruments and hedged items, and measure at each balance sheet date the effectivenessfurther discussions of our hedges. The effective portion of the change in fair value of the derivative is reported in AOCI and subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. For the fiscal year ended June 30, 2016 we reclassified $(13.2) million in net losses into cost of goods sold from AOCI. For the fiscal years ended June 30, 2015 and 2014 we reclassified $4.2 million and $1.2 million, respectively, in net gains into cost of goods sold from AOCI. Any ineffective portion of the derivative's change in fair value is recognized currently in “Other, net.” Gains or losses deferred in AOCI associated with terminated derivative instruments, derivative instruments that cease to be highly effective hedges, derivative instruments for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, we recognize any gain or loss deferred in AOCI in “Other, net” at that time. For the fiscal years ended June 30, 2016, 2015 and 2014, we recognized in “Other, net” $(0.6) million, $(0.3) million and $(0.3) million, respectively, in net losses on coffee-related derivative instruments designated as cash flow hedges due to ineffectiveness.instruments.
For derivative instruments that are not designated in a hedging relationship, and for which the normal purchases and normal sales exception has not been elected, the changes in fair value are reported in “Other, net.”
For the fiscal years ended June 30, 2016, 2015 and 2014, we recorded in “Other, net” net (losses) gains on coffee-related derivative instruments not designated as accounting hedges in the amounts of $(0.3) million, $(3.0) million and $2.7 million, respectively.
The following table summarizes the potential impact as of June 30, 20162019 to net income (loss) and AOCI from a hypothetical 10% change in coffee commodity prices. The information provided below relates only to the coffee-related derivative instruments and does not include, when applicable, the corresponding changes in the underlying hedged items:
| | | | | Increase (Decrease) to Net Income | | Increase (Decrease) to AOCI | | Increase (Decrease) to Net Income | | Increase (Decrease) to AOCI |
| | | 10% Increase in Underlying Rate | | 10% Decrease in Underlying Rate | | 10% Increase in Underlying Rate | | 10% Decrease in Underlying Rate | | 10% Increase in Underlying Rate | | 10% Decrease in Underlying Rate | | 10% Increase in Underlying Rate | | 10% Decrease in Underlying Rate |
| (In thousands) | | |
| Coffee-related derivative instruments(1) | | $ | 118 |
| | $ | (118 | ) | | $ | 4,941 |
| | $ | (4,941 | ) | | $ | 674 |
| | $ | (674 | ) | | $ | 4,904 |
| | $ | (4,904 | ) |
__________
(1) The Company's purchase contracts that qualify as normal purchases include green coffee purchase commitments for which the price has been locked in as of June 30, 2016.2019. These contracts are not included in the sensitivity analysis above as the underlying price has been fixed.
|
| |
| Item 8. | Financial Statements and Supplementary Data |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Farmer Bros. Co.
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of Farmer Bros. Co. and subsidiaries (the "Company") as of June 30, 2016 and 2015 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, 2016. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the consolidated 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, such consolidated financial statements present fairly, in all material respects, the financial position of Farmer Bros. Co. and subsidiaries as of June 30, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2016, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of June 30, 2016, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 13, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
September 13, 2016
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data) |
| | | | | | | |
| | June 30, 2016 | | June 30, 2015 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 21,095 |
| | $ | 15,160 |
|
| Restricted cash | — |
| | 1,002 |
|
| Short-term investments | 25,591 |
| | 23,665 |
|
| Accounts and notes receivable, net of allowance for doubtful accounts of $714 and $643, respectively | 44,364 |
| | 40,161 |
|
| Inventories | 46,378 |
| | 50,522 |
|
| Income tax receivable | 247 |
| | 535 |
|
| Short-term derivative assets | 3,954 |
| | — |
|
| Prepaid expenses | 4,557 |
| | 4,640 |
|
| Assets held for sale | 7,179 |
| | — |
|
| Total current assets | 153,365 |
| | 135,685 |
|
| Property, plant and equipment, net | 118,416 |
| | 90,201 |
|
| Goodwill and intangible assets, net | 6,491 |
| | 6,691 |
|
| Other assets | 9,933 |
| | 7,615 |
|
| Deferred income taxes | 80,786 |
| | 751 |
|
| Total assets | $ | 368,991 |
| | $ | 240,943 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | 23,919 |
| | 27,023 |
|
| Accrued payroll expenses | 24,540 |
| | 23,005 |
|
| Short-term borrowings under revolving credit facility | 109 |
| | 78 |
|
| Short-term obligations under capital leases | 1,323 |
| | 3,249 |
|
| Short-term derivative liabilities | — |
| | 3,977 |
|
| Deferred income taxes | — |
| | 1,390 |
|
| Other current liabilities | 6,946 |
| | 6,152 |
|
| Total current liabilities | 56,837 |
| | 64,874 |
|
| Accrued pension liabilities | 68,047 |
| | 47,871 |
|
| Accrued postretirement benefits | 20,808 |
| | 23,471 |
|
| Accrued workers’ compensation liabilities | 11,459 |
| | 10,964 |
|
| Other long-term liabilities-capital leases | 1,036 |
| | 2,599 |
|
| Other long-term liabilities | 28,210 |
| | 225 |
|
| Deferred income taxes | — |
| | 928 |
|
| Total liabilities | $ | 186,397 |
| | $ | 150,932 |
|
| Commitments and contingencies (Note 22) |
| |
|
| 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; 16,781,561 and 16,658,148 shares issued and outstanding at June 30, 2016 and 2015, respectively | 16,782 |
| | 16,658 |
|
| Additional paid-in capital | 39,096 |
| | 38,143 |
|
| Retained earnings | 196,782 |
| | 106,864 |
|
| Unearned ESOP shares | (6,434 | ) | | (11,234 | ) |
| Accumulated other comprehensive loss | (63,632 | ) | | (60,420 | ) |
| Total stockholders’ equity | $ | 182,594 |
| | $ | 90,011 |
|
| Total liabilities and stockholders’ equity | $ | 368,991 |
| | $ | 240,943 |
|
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, |
| | 2016 | | 2015 | | 2014 |
| Net sales | $ | 544,382 |
| | $ | 545,882 |
| | $ | 528,380 |
|
| Cost of goods sold | 335,907 |
| | 348,846 |
| | 332,466 |
|
| Gross profit | 208,475 |
| | 197,036 |
| | 195,914 |
|
| Selling expenses | 150,198 |
| | 151,753 |
| | 155,088 |
|
| General and administrative expenses | 41,970 |
| | 31,173 |
| | 35,724 |
|
| Restructuring and other transition expenses | 16,533 |
| | 10,432 |
| | — |
|
| Net gains from sale of Spice Assets | (5,603 | ) | | — |
| | — |
|
| Net (gains) losses from sales of assets | (2,802 | ) | | 394 |
| | (3,814 | ) |
| Operating expenses | 200,296 |
| | 193,752 |
| | 186,998 |
|
| Income from operations | 8,179 |
| | 3,284 |
| | 8,916 |
|
| Other income (expense): | | | | | |
| Dividend income | 1,115 |
| | 1,172 |
| | 1,073 |
|
| Interest income | 496 |
| | 381 |
| | 429 |
|
| Interest expense | (425 | ) | | (769 | ) | | (1,258 | ) |
| Other, net | 556 |
| | (3,014 | ) | | 3,677 |
|
| Total other income (expense) | 1,742 |
| | (2,230 | ) | | 3,921 |
|
| Income before taxes | 9,921 |
| | 1,054 |
| | 12,837 |
|
| Income tax (benefit) expense | (79,997 | ) | | 402 |
| | 705 |
|
| Net income | $ | 89,918 |
| | $ | 652 |
| | $ | 12,132 |
|
| Net income per common share—basic | $ | 5.45 |
| | $ | 0.04 |
| | $ | 0.76 |
|
| Net income per common share—diluted | $ | 5.41 |
| | $ | 0.04 |
| | $ | 0.76 |
|
| Weighted average common shares outstanding—basic | 16,502,523 |
| | 16,127,610 |
| | 15,909,631 |
|
| Weighted average common shares outstanding—diluted | 16,627,402 |
| | 16,267,134 |
| | 16,014,587 |
|
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, |
| | 2016 | | 2015 | | 2014 |
| Net income | $ | 89,918 |
| | $ | 652 |
| | $ | 12,132 |
|
| Other comprehensive income (loss), net of tax: | | | | | |
| Unrealized gains (losses) on derivative instruments designated as cash flow hedges, net of taxes | 185 |
| | (14,295 | ) | | 18,685 |
|
| Losses (Gains) on derivative instruments designated as cash flow hedges reclassified to cost of goods sold, net of taxes | 8,064 |
| | (4,211 | ) | | (1,161 | ) |
| Change in the funded status of retiree benefit obligations, net of taxes | (11,461 | ) | | (14,122 | ) | | (2,802 | ) |
| Total comprehensive income (loss), net of tax | $ | 86,706 |
| | $ | (31,976 | ) | | $ | 26,854 |
|
The accompanying notes are an integral part of these financial statements.
|
| | | | | | | | | | | |
| FARMER BROS. CO. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (In thousands) |
| | Year Ended June 30, |
| | 2016 | | 2015 | | 2014 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 89,918 |
| | $ | 652 |
| | $ | 12,132 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Depreciation and amortization | 20,774 |
| | 24,179 |
| | 27,334 |
|
| Provision for (recovery of) doubtful accounts | 71 |
| | (8 | ) | | 80 |
|
| Restructuring and other transition expenses, net of payments | (2,697 | ) | | 6,608 |
| | — |
|
| Deferred income taxes | (80,314 | ) | | 123 |
| | 137 |
|
| Net (gains) losses from sales of assets | (8,405 | ) | | 394 |
| | (3,814 | ) |
| ESOP and share-based compensation expense | 4,342 |
| | 5,691 |
| | 4,692 |
|
| Net losses (gains) on derivative instruments and investments | 12,910 |
| | (950 | ) | | (4,276 | ) |
| Change in operating assets and liabilities: | | | | | |
| Restricted cash | 1,002 |
| | (1,002 | ) | | 8,084 |
|
| Purchases of trading securities held for investment | (7,255 | ) | | (3,661 | ) | | (5,915 | ) |
| Proceeds from sales of trading securities held for investment | 5,901 |
| | 2,358 |
| | 4,290 |
|
| Accounts and notes receivable | (3,476 | ) | | 2,078 |
| | 2,248 |
|
| Inventories | 3,608 |
| | 20,470 |
| | (14,439 | ) |
| Income tax receivable | 288 |
| | (307 | ) | | 181 |
|
| Derivative (liabilities) assets, net | (10,583 | ) | | (7,269 | ) | | 3,932 |
|
| Prepaid expenses and other assets | (111 | ) | | (1,332 | ) | | (661 | ) |
| Accounts payable | (3,343 | ) | | (16,841 | ) | | 17,526 |
|
| Accrued payroll expenses and other current liabilities | 5,829 |
| | (4,606 | ) | | 2,574 |
|
| Accrued postretirement benefits | (358 | ) | | (1,507 | ) | | (1,905 | ) |
| Other long-term liabilities | (473 | ) | | 1,860 |
| | 695 |
|
| Net cash provided by operating activities | $ | 27,628 |
| | $ | 26,930 |
| | $ | 52,895 |
|
| Cash flows from investing activities: | | | | | |
| Acquisition of business, net of cash acquired | $ | — |
| | $ | (1,200 | ) | | $ | — |
|
| Purchases of property, plant and equipment | (31,050 | ) | | (19,216 | ) | | (25,267 | ) |
| Purchases of construction-in-progress assets under New Facility lease | (19,426 | ) | | — |
| | — |
|
| Proceeds from sales of property, plant and equipment | 10,946 |
| | 273 |
| | 4,536 |
|
| Net cash used in investing activities | $ | (39,530 | ) | | $ | (20,143 | ) | | $ | (20,731 | ) |
| Cash flows from financing activities: | | | | | |
| Proceeds from revolving credit facility | $ | 405 |
| | $ | 63,376 |
| | $ | 44,806 |
|
| Repayments on revolving credit facility | (374 | ) | | (63,947 | ) | | (65,454 | ) |
| Proceeds from New Facility lease financing | 19,426 |
| | — |
| | — |
|
| Payments of capital lease obligations | (3,147 | ) | | (3,910 | ) | | (3,681 | ) |
| Payment of financing costs | (8 | ) | | (571 | ) | | — |
|
| Proceeds from stock option exercises | 1,694 |
| | 1,548 |
| | 1,480 |
|
| Tax withholding payment - net share settlement of equity awards | (159 | ) | | (116 | ) | | — |
|
| Net cash provided by (used in) financing activities | $ | 17,837 |
| | $ | (3,620 | ) | | $ | (22,849 | ) |
| (continued on next page) |
|
| | | | | | | | | | | |
| FARMER BROS. CO. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (In thousands) |
| | Year Ended June 30, |
| | 2016 | | 2015 | | 2014 |
| Net increase in cash and cash equivalents | $ | 5,935 |
| | $ | 3,167 |
| | $ | 9,315 |
|
| Cash and cash equivalents at beginning of year | 15,160 |
| | 11,993 |
| | 2,678 |
|
| Cash and cash equivalents at end of year | $ | 21,095 |
| | $ | 15,160 |
| | $ | 11,993 |
|
|
| | | | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | |
| Cash paid for interest | $ | 425 |
| | $ | 769 |
| | $ | 1,258 |
|
| Cash paid for income taxes | 324 |
| | $ | 858 |
| | $ | 361 |
|
| Supplemental disclosure of non-cash investing activities: | | | | | |
| Equipment acquired under capital leases | $ | — |
| | $ | 55 |
| | $ | 1,217 |
|
Net change in derivative assets and liabilities included in other comprehensive income (loss), net of tax | $ | 8,249 |
| | $ | (18,506 | ) | | $ | 17,524 |
|
| Construction-in-progress assets under New Facility lease | $ | 8,684 |
| | $ | — |
| | $ | — |
|
| New Facility lease obligation | $ | 8,684 |
| | $ | — |
| | $ | — |
|
| Non-cash additions to equipment | $ | 441 |
| | $ | 51 |
| | $ | 142 |
|
| Asset held for sale | $ | 7,179 |
| | $ | — |
| | $ | — |
|
| Non-cash portion of earnout recognized | $ | 496 |
| | $ | — |
| | $ | — |
|
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, 2013 | 16,454,422 |
| | $ | 16,454 |
| | $ | 34,654 |
| | $ | 94,080 |
| | $ | (20,836 | ) | | $ | (42,514 | ) | | $ | 81,838 |
|
| Net income | — |
| | — |
| | — |
| | 12,132 |
| | — |
| | — |
| | 12,132 |
|
| Unrealized gains on derivative instruments designated as cash flow hedges, net of reclassifications to cost of goods sold | — |
| | — |
| | — |
| | — |
| | — |
| | 17,524 |
| | 17,524 |
|
| Change in the funded status of retiree benefit obligations, net of tax of zero | — |
| | — |
| | — |
| | — |
| | — |
| | (2,802 | ) | | (2,802 | ) |
| ESOP compensation expense, including reclassifications | — |
| | — |
| | (1,475 | ) | | — |
| | 4,801 |
| | — |
| | 3,326 |
|
| Share-based compensation | (4,936 | ) | | (5 | ) | | 1,371 |
| | — |
| | — |
| | — |
| | 1,366 |
|
| Stock option exercises | 112,964 |
| | 113 |
| | 1,367 |
| | — |
| | — |
| | — |
| | 1,480 |
|
| Balance at June 30, 2014 | 16,562,450 |
| | $ | 16,562 |
| | $ | 35,917 |
| | $ | 106,212 |
| | $ | (16,035 | ) | | $ | (27,792 | ) | | $ | 114,864 |
|
| Net income | — |
| | — |
| | — |
| | 652 |
| | — |
| | — |
| | 652 |
|
| Unrealized losses on derivative instruments designated as cash flow hedges, net of reclassifications to cost of goods sold | — |
| | — |
| | — |
| | — |
| | — |
| | (18,506 | ) | | (18,506 | ) |
| Change in the funded status of retiree benefit obligations, net of tax of zero | — |
| | — |
| | — |
| | — |
| | — |
| | (14,122 | ) | | (14,122 | ) |
| ESOP compensation expense, including reclassifications | — |
| | — |
| | (377 | ) | | — |
| | 4,801 |
| | — |
| | 4,424 |
|
| Share-based compensation | 4,272 |
| | 4 |
| | 1,263 |
| | — |
| | — |
| | — |
| | 1,267 |
|
| Stock option exercises | 95,723 |
| | 96 |
| | 1,452 |
| | — |
| | — |
| | — |
| | 1,548 |
|
| Shares withheld to cover taxes | (4,297 | ) | | (4 | ) | | (112 | ) | | — |
| | — |
| | — |
| | (116 | ) |
| Balance at June 30, 2015 | 16,658,148 |
| | $ | 16,658 |
| | $ | 38,143 |
| | $ | 106,864 |
| | $ | (11,234 | ) | | $ | (60,420 | ) | | $ | 90,011 |
|
| Net income | — |
| | — |
| | — |
| | 89,918 |
| | — |
| | — |
| | 89,918 |
|
| Unrealized gains on derivative instruments designated as cash flow hedges, net of reclassifications to cost of goods sold, net of tax of $5,238 | — |
| | — |
| | — |
| | — |
| | — |
| | 8,249 |
| | 8,249 |
|
| Change in the funded status of retiree benefit obligations, net of tax benefit of $7,277 | — |
| | — |
| | — |
| | — |
| | — |
| | (11,461 | ) | | (11,461 | ) |
| ESOP compensation expense, including reclassifications | — |
| | — |
| | (1,413 | ) | | — |
| | 4,800 |
| | — |
| | 3,387 |
|
| Share-based compensation | 1,551 |
| | 2 |
| | 954 |
| | — |
| | — |
| | — |
| | 956 |
|
| Stock option exercises | 127,039 |
| | 127 |
| | 1,566 |
| | — |
| | — |
| | — |
| | 1,693 |
|
| Shares withheld to cover taxes | (5,177 | ) | | (5 | ) | | (154 | ) | | — |
| | — |
| | — |
| | (159 | ) |
| Balance at June 30, 2016 | 16,781,561 |
| | $ | 16,782 |
| | $ | 39,096 |
| | $ | 196,782 |
| | $ | (6,434 | ) | | $ | (63,632 | ) | | $ | 182,594 |
|
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
Overview
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company,” or “Farmer Bros.”),information required by this item is a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products. The Company serves a wide variety of customers, from small independent restaurants and foodservice operatorsincorporated by reference to large institutional buyers like restaurant and convenience store chains, hotels, casinos, hospitals, and gourmet coffee houses, as well as grocery chains with private brand and consumer-branded coffee products. The Company’s product categories consist of roast and ground coffee, frozen liquid coffee; flavored and unflavored iced and hot teas; culinary products; spices; and other beverages including cappuccino, cocoa, granitas, and ready-to-drink iced coffee. The Company was founded in 1912, incorporated in California in 1923, and reincorporated in Delaware in 2004. The Company operates in one business segment.
The Company operates production facilities in Portland, Oregon and Houston, Texas. Distribution takes place out of the Portland facility as well as separate distribution centers in Northlake, Illinois; Oklahoma City, Oklahoma; and Moonachie, New Jersey. As of June 30, 2016, the Company’s Torrance facility continued to house certain administrative functions and serve as a distribution facility and branch warehouse pending transition of the Company’s remaining Torrance operations to its other facilities.
The Company’s products reach its customers primarily in two ways: through the Company’s nationwide direct-store-delivery, or DSD, network of 450 delivery routes and 109 branch warehouses as of June 30, 2016, or direct-shipped via common carriers or third-party distributors. The Company operates a large fleet of trucks and other vehicles to distribute and deliver its products, and relies on third-party logistic (“3PL”) service providers for its long-haul distribution. DSD sales are made “off-truck” by the Company to its customers at their places of business.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries FBC Finance Company, a California corporation, Coffee Bean Holding Co., Inc., a Delaware corporation, the parent company of Coffee Bean International, Inc., an Oregon corporation (“CBI”), and CBI. All inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company reviews its estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates and actual results may differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original maturity dates of 90 days or less to be cash equivalents. Fair values of cash equivalents approximate cost due to the short period of time to maturity.
Investments
The Company’s investments consist of money market instruments, marketable debt, equity and hybrid securities. Investments are held for trading purposes and stated at fair value. The cost of investments sold is determined on the specific identification method. Dividend and interest income are accrued as earned. See Note 8.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Fair Value Measurements
The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
•Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.
•Level 2—Valuation is based upon inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (i.e. interest rate and yield curves observable at commonly quoted intervals, default rates, etc.). Observable inputs include quoted prices for similar instruments in active and non- active markets. Level 2 includes those financial instruments that are valued with industry standard valuation models that incorporate inputs that are observablenotes set forth in the marketplace throughout the full termF pages of the instrument, or can otherwise be derived from or supported by observable market data in the marketplace. Level 2 inputs may also include insignificant adjustments to market observable inputs.this Annual Report on Form 10-K.
•Level 3—Valuation is based upon one or more unobservable inputs that are significant in establishing a fair value estimate. These unobservable inputs are used to the extent relevant observable inputs are not available and are developed based on the best information available. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.Securities with quotes that are based on actual trades or actionable bids and offers with a sufficient level of activity on or near the measurement date are classified as Level 1. Securities that are priced using quotes derived from implied values, indicative bids and offers, or a limited number of actual trades, or the same information for securities that are similar in many respects to those being valued, are classified as Level 2. If market information is not available for securities being valued, or materially-comparable securities, then those securities are classified as Level 3. In considering market information, management evaluates changes in liquidity, willingness of a broker to execute at the quoted price, the depth and consistency of prices from pricing services, and the existence of observable trades in the market (see Note 9).Derivative Instruments
The Company purchases various derivative instruments to create economic hedges of its commodity price risk. These derivative instruments consist primarily of forward and option contracts. The Company reports the fair value of derivative instruments on its consolidated balance sheets in “Short-term derivative assets,” “Other assets,” “Short-term derivative liabilities,” or “Other long-term derivative liabilities.” The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades and reports these amounts on a gross basis. Additionally, the Company reports cash held on deposit in margin accounts for coffee-related derivative instruments on a gross basis on its consolidated balance sheet in “Restricted cash” if restricted from withdrawal due to a net loss position in such margin accounts.
The accounting for the changes in fair value of the Company's derivative instruments can be summarized as follows: |
| | |
Derivative Treatment | | Accounting Method |
Normal purchases and normal sales exception | | Accrual accounting |
Designated in a qualifying hedging relationship | | Hedge accounting |
All other derivative instruments | | Mark-to-market accounting |
The Company enters into green coffee purchase commitments at a fixed price or at a price to be fixed (“PTF”). PTF contracts are purchase commitments whereby the quality, quantity, delivery period, price differential to the coffee “C” market price and other negotiated terms are agreed upon, but the date, and therefore the price at which the base “C” market price will be fixed has not yet been established. The coffee “C” market price is fixed at some point after the purchase contract date and before the futures market closes for the delivery month and may be fixed either at the direction of the Company to the vendor, or by the application of a derivative that was separately purchased as a hedge. For both fixed-price and PTF contracts, the Company expects to take delivery of and to utilize the coffee in a reasonable period of time and in the conduct of normal business. Accordingly, these purchase commitments qualify as normal purchases and are not recorded at fair value on the Company's consolidated balance sheets.
The Company follows the guidelines of Accounting Standards Codification (“ASC”) 815, “Derivatives and Hedging” (“ASC 815”), to account for certain coffee-related derivative instruments as accounting hedges in order to minimize the volatility created in the Company's quarterly results from utilizing these derivative contracts and to improve comparability between reporting periods. For a derivative to qualify for designation in a hedging relationship, it must meet specific criteria
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
and the Company must maintain appropriate documentation. The Company establishes hedging relationships pursuant to its risk management policies. The hedging relationships are evaluated at inception and on an ongoing basis to determine whether the hedging relationship is, and is expected to remain, highly effective in achieving offsetting changes in fair value or cash flows attributable to the underlying risk being hedged. The Company also regularly assesses whether the hedged forecasted transaction is probable of occurring. If a derivative ceases to be or is no longer expected to be highly effective, or if the Company believes the likelihood of occurrence of the hedged forecasted transaction is no longer probable, hedge accounting is discontinued for that derivative, and future changes in the fair value of that derivative are recognized in “Other, net.”
For coffee-related derivative instruments designated as cash flow hedges, the effective portion of the change in fair value of the derivative is reported as accumulated other comprehensive income (loss) (“AOCI”) and subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. Any ineffective portion of the derivative instrument's change in fair value is recognized currently in “Other, net.” Gains or losses deferred in AOCI associated with terminated derivative instruments, derivative instruments that cease to be highly effective hedges, derivative instruments for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, any gain or loss deferred in AOCI is recognized in “Other, net” at that time. For derivative instruments that are not designated in a hedging relationship, and for which the normal purchases and normal sales exception has not been elected, the changes in fair value are reported in “Other, net.”
The following gains and losses on derivative instruments are netted together and reported in “Other, net” in the Company's consolidated statements of operations:
Gains and losses on all derivative instruments that are not designated as cash flow hedges and for which the normal purchases and normal sales exception has not been elected; and
The ineffective portion of unrealized gains and losses on derivative instruments that are designated as cash flow hedges.
The fair value of derivative instruments is based upon broker quotes. At June 30, 2016 and 2015 approximately 96% and 94%, respectively, of the Company's outstanding coffee-related derivative instruments were designated as cash flow hedges (see Note 7).Concentration of Credit Risk
At June 30, 2016, the financial instruments which potentially expose the Company to concentration of credit risk consist of cash in financial institutions (in excess of federally insured limits), short-term investments, investments in the preferred stocks of other companies, derivative instruments 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.
The Company does not have any credit-risk related contingent features that would require it to post additional collateral in support of its net derivative liability positions. At June 30, 2016, because the Company had a net gain position in its coffee-related derivative margin accounts, none of the cash in these accounts was restricted. At June 30, 2015, the Company had $1.0 million in restricted cash representing cash held on deposit in margin accounts for coffee-related derivative instruments due to a net loss position in such accounts. Changes in commodity prices and the number of coffee-related derivative instruments held could have a significant impact on cash deposit requirements under the Company's broker and counterparty agreements.
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 2016 and 2014, the Company increased the allowance for doubtful accounts by $71,000 and $80,000, respectively. In fiscal 2015, the Company decreased the allowance for doubtful accounts by $8,000.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
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 parts on a first in, first out (“FIFO”) basis. The Company regularly evaluates these inventories to determine inventory reserves for obsolete and slow-moving inventory. Inventory reserves are based on inventory obsolescence trends, historical experience and application of specific identification.
At the end of each quarter, the Company records the expected effect of the liquidation of LIFO inventory quantities, if any, 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. See Note 11.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:
|
| |
BuildingsItem 9. | Changes in and facilities | 10 to 30 years |
MachineryDisagreements with Accountants on Accounting and equipment | 3 to 5 years |
Equipment under capital leases | Term of lease |
Office furniture and equipment | 5 years |
Capitalized software | 3 yearsFinancial Disclosure |
Leasehold improvements are depreciated on a straight-line basis over the lesser of the estimated useful life of the asset or the remaining lease term. When assets are sold or retired, the asset and related accumulated depreciation are removed from the respective account balances and any gain or loss on disposal is included in operations. Maintenance and repairs are charged to expense, and betterments are capitalized. See None.Note 12.Assets to be disposed of by sale are recorded as held for sale at the lower of carrying value or estimated net realizable value. The Company considers properties to be assets held for sale when (1) management commits to a plan to sell the property; (2) it is unlikely that the disposal plan will be significantly modified or discontinued; (3) the property is available for immediate sale in its present condition; (4) actions required to complete the sale of the property have been initiated; (5) sale of the property is probable and the Company expects the completed sale will occur within one year; and (6) the property is actively being marketed for sale at a price that is reasonable given the Company's estimate of current market value. Upon designation of a property as an asset held for sale, the Company records the property’s value at the lower of its carrying value or its estimated fair value less estimated costs to sell and ceases depreciation. See Note 6.The Company may incur certain other non-cash asset impairment costs in connection with the Corporate Relocation Plan.
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. The Company capitalizes coffee brewing equipment and depreciates it over an estimated three or five year period, depending on the assessment of the useful life and reports the depreciation expense in cost of goods sold. Accordingly, such costs included in cost of goods sold in the accompanying consolidated financial statements for the years ended June 30, 2016, 2015 and 2014 are $27.0 million, $26.6 million and $25.9 million, respectively. In addition, depreciation expense related to capitalized coffee brewing equipment reported in cost of goods sold in the fiscal years ended June 30, 2016, 2015 and 2014 was $9.8 million, $10.4 million and $10.9 million, respectively. The Company capitalized coffee brewing equipment (included in machinery and equipment) in the amounts of $8.4 million and $10.7 million in fiscal 2016 and 2015, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Leases
Leases are categorized as either operating or capital leases at inception. Operating lease costs are recognized on a straight-line basis over the term of the lease. An asset and a corresponding liability for the capital lease obligation are established for the cost of capital leases. The capital lease obligation is amortized over the life of the lease. For leases such as the New Facility lease, the Company establishes an asset and liability for the estimated construction costs incurred to the extent that it is involved in the construction of structural improvements or takes construction risk prior to the commencement of the lease. A portion of the lease arrangement is allocated to the land for which the Company accrues rent expense during the construction period. The amount of rent expense to be accrued is determined using the fair value of the leased land at construction commencement and the Company’s incremental borrowing rate, and recognized on a straight-line basis. See Note 4.Income Taxes
Deferred income taxes are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. Estimating the Company’s tax liabilities involves judgments related to uncertainties in the application of complex tax regulations. The Company makes certain estimates and judgments to determine tax expense for financial statement purposes as it evaluates the effect of tax credits, tax benefits and deductions, some of which result from differences in the timing of recognition of revenue or expense for tax and financial statement purposes. Changes to these estimates may result in significant changes to the Company’s tax provision in future periods. Each fiscal quarter the Company re-evaluates its tax provision and reconsiders its estimates and assumptions related to specific tax assets and liabilities, making adjustments as circumstances change.
Deferred Tax Asset Valuation Allowance
The Company evaluates its deferred tax assets quarterly to determine if a valuation allowance is required and considers whether a valuation allowance should be recorded against deferred tax assets based on the likelihood that the benefits of the deferred tax assets will or will not ultimately be realized in future periods. In making this assessment, significant weight is given to evidence that can be objectively verified, such as recent operating results, and less consideration is given to less objective indicators, such as future income projections. After consideration of positive and negative evidence, including the recent history of income, if the Company determines that it is more likely than not that it will generate future income sufficient to realize its deferred tax assets, the Company will record a reduction in the valuation allowance. See Note 20.Revenue Recognition
The Company recognizes sales revenue when all of the following have occurred: (1) delivery; (2) persuasive evidence of an agreement exists; (3) pricing is fixed or determinable; and (4) collection is reasonably assured. When product sales are made “off-truck” to the Company’s customers at their places of business or products are shipped by third-party delivery "FOB Destination," title passes and revenue is recognized upon delivery. When customers pick up products at the Company's distribution centers, title passes and revenue is recognized upon product pick up.
Net Income Per Common Share
Net income per share (“EPS”) represents net income attributable to common stockholders divided by the weighted-average number of common shares outstanding for the period, excluding unallocated shares held by the Company's Employee Stock Ownership Plan (“ESOP”) (see Note 16). Diluted EPS represents net income 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. 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, net income attributable to nonvested restricted stockholders is excluded from net income attributable to common stockholders for purposes of calculating basic and diluted EPS. Computation of EPS for the years ended June 30, 2016, 2015 and 2014 includes the dilutive effect of 124,879, 139,524 and 104,956 shares, respectively, issuable under stock options with exercise prices below the closing price of the Company's common stock on the last trading day of the applicable period, but excludes the dilutive effect of 30,931, 10,455 and 22,441 shares, respectively, issuable under stock options with exercise prices above the closing price of the Company's common stock on the last trading day of the applicable period because their inclusion would be anti-dilutive. See Note 21.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Dividends
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, credit agreement restrictions, future prospects for earnings and cash flows, as well as other relevant factors.
Employee Stock Ownership Plan
Compensation cost for the ESOP is based on the fair market value of shares released or deemed to be released to employees in the period in which they are committed. 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 expense is recognized (see Note 16). 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.Share-based Compensation
On December 5, 2013, the Company’s stockholders approved the Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (the “Amended Equity Plan”). The principal change to the Amended Equity Plan was to limit awards under the plan to performance-based stock options and to restricted stock under limited circumstances.
The Company measures all share-based compensation cost at the grant date, based on the fair values of the awards that are ultimately expected to vest, and recognizes that cost as an expense on a straight line-basis in its consolidated statements of operations over the requisite service period. Fair value of restricted stock is the closing price of the Company's common stock on the date of grant. The Company estimates the fair value of option awards using the Black-Scholes option valuation model, which requires management to make certain assumptions for estimating the fair value of stock options at the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. 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 of the fair value of the Company’s stock options. Although the 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. See Note 17.Impairment of Goodwill and Indefinite-lived Intangible Assets
The Company accounts for its goodwill and indefinite-lived intangible assets in accordance with ASC 350, “Intangibles-Goodwill and Other” (“ASC 350”). Goodwill and other indefinite-lived intangible assets are not amortized but instead are reviewed for impairment annually, or more frequently if an event occurs or circumstances change which indicate that an asset might be impaired. Pursuant to ASC 350, the Company performs a qualitative assessment of goodwill and indefinite-lived intangible assets on its consolidated balance sheets, to determine if there is a more likely than not indication that its goodwill and indefinite-lived intangible assets are impaired as of June 30. If the indicators of impairment are present, the Company performs a quantitative assessment to determine the impairment of these assets as of the measurement date.
Testing for impairment of goodwill is a two-step process. The first step requires the Company to compare the fair value of its reporting unit to the carrying value of the reporting unit, including goodwill. If the fair value of the reporting unit is less than its 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.
Indefinite-lived intangible assets are tested for impairment by comparing their fair values to their carrying values. An impairment charge is recorded if the estimated fair value of such assets has decreased below their carrying values. 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
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
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.
There were no intangible asset or goodwill impairment charges recorded in the fiscal year ended June 30, 2016 or 2015.
Other Intangible Assets
Other intangible assets consist of finite-lived intangible assets including acquired non-compete agreements and customer relationships. These are amortized over their estimated useful lives and are tested for impairment by grouping them with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. The Company reviews the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. There were no other intangible asset impairment charges recorded in the fiscal year ended June 30, 2016 and 2015.
Shipping and Handling Costs
Shipping and handling costs incurred through outside carriers are recorded as a component of the Company's selling expenses and were $13.3 million, $8.3 million and $8.4 million, respectively, in the fiscal years ended June 30, 2016, 2015 and 2014. Shipping and handling costs in fiscal 2016 include costs related to the Company's move to 3PL for its long-haul operations.
Collective Bargaining Agreements
Certain Company employees are subject to collective bargaining agreements. The duration of these agreements extend to 2020. At June 30, 2016, approximately 31% of the Company's workforce was covered by such agreements.
Self-Insurance
The Company uses a combination of insurance and self-insurance mechanisms, including the use of captive insurance entities and participation in a reinsurance treaty, to provide for the potential liability of certain risks including workers’ compensation, health care benefits, general liability, product liability, property insurance and director and officers’ liability insurance. Liabilities associated with risks retained by the Company are not discounted and are estimated by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions.
The Company's self-insurance for workers’ compensation liability includes estimated outstanding losses of unpaid claims. and allocated loss adjustment expenses (“ALAE”), case reserves, the development of known claims and incurred but not reported claims. ALAE are the direct expenses for settling specific claims. The amounts reflect per occurrence and annual aggregate limits maintained by the Company. The estimated liability analysis does not include estimating a provision for unallocated loss adjustment expenses.
The estimated gross undiscounted workers’ compensation liability relating to such claims was $14.7 million and $13.4 million respectively, and the estimated recovery from reinsurance was $2.4 million and $2.5 million, respectively, as of June 30, 2016 and 2015. The short-term and long-term accrued liabilities for workers’ compensation claims are presented on the Company's consolidated balance sheets in “Other current liabilities” and in “Accrued workers' compensation liabilities,” respectively. The estimated insurance receivable is included in “Other assets” on the Company's consolidated balance sheets.
At June 30, 2016 and 2015, the Company posted a $7.4 million and $7.0 million letter of credit, respectively, as a security deposit with the State of California Department of Industrial Relations Self-Insurance Plans for participation in the alternative security program for California self-insurers for workers’ compensation liability. At June 30, 2016 and 2015, the Company had posted a $4.3 million letter of credit as a security deposit for self-insuring workers’ compensation, general liability and auto insurance coverages outside of California.
The estimated liability related to the Company's self-insured group medical insurance at June 30, 2016 and 2015 was $1.3 million and $1.0 million, respectively, 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.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
General liability, product liability and commercial auto liability are insured through a captive insurance program. The Company's liability reserve for such claims was $0.9 million and $0.8 million at June 30, 2016 and 2015, respectively.
The estimated liability related to the Company's self-insured group medical insurance, general liability, product liability and commercial auto liability is included on the Company's consolidated balance sheets in “Other current liabilities.”
Pension Plans
The Company’s pension plans are not admitting new participants, therefore, changes to pension liabilities are primarily due to market fluctuations of investments for existing participants and changes in interest rates. All plans are accounted for using the guidance of ASC 710, "Compensation - General" and ASC 715 "Compensation-Retirement Benefits" and are measured as of the end of the fiscal year.
The Company recognizes the overfunded or underfunded status of a defined benefit pension or postretirement plan as an asset or liability in the accompanying consolidated balance sheets. Changes in the funded status are recognized through AOCI, in the year in which the changes occur. See Note 14.Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. The purchase price of each business acquired is allocated to the tangible and intangible assets acquired and the liabilities assumed based on information regarding their respective fair values on the date of acquisition. Any excess of the purchase price over the fair value of the separately identifiable assets acquired and the liabilities assumed is allocated to goodwill. Management determines the fair values used in purchase price allocations for intangible assets based on historical data, estimated discounted future cash flows, and expected royalty rates for trademarks and trade names, as well as certain other information. The valuation of assets acquired and liabilities assumed requires a number of judgments and is subject to revision as additional information about the fair value of assets and liabilities becomes available. Additional information, which existed as of the acquisition date but unknown to the Company at that time, may become known during the remainder of the measurement period, a period not to exceed twelve months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill and intangible assets. Acquisition costs are expensed as incurred. The results of operations of businesses acquired are included in the consolidated financial statements from their dates of acquisition. See Note 2.
Sale of Spice Assets
On December 8, 2015, the Company completed the sale of certain assets associated with the Company’s manufacture, processing and distribution of raw, processed and blended spices and certain other culinary products (collectively, the “Spice Assets”) to Harris Spice Company, Inc. (“Harris”). The Company has followed the guidance in ASC 205-20, "Presentation of Financial Statements-Discontinued Operations," as updated by Accounting Standards Update ("ASU") No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity" and has not presented the sale of the Spice Assets as discontinued operations. Gain from the earnout on the sale is recognized when earned and when realization is assured beyond a reasonable doubt. See Note 5.
Recently Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board (the "FASB") issued ASU No. 2016-05, "Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships (a consensus of the FASB Emerging Issues Task Force" ("ASU 2016-05"). ASU 2016-05 clarifies that "a change in the counterparty to a derivative instrument that has been designated as the hedging instrument in an existing hedging relationship would not, in and of itself, be considered a termination of the derivative instrument" or "a change in a critical term of the hedging relationship." As long as all other hedge accounting criteria in ASC 815 are met, a hedging relationship in which the hedging derivative instrument is novated would not be discontinued or require redesignation. This clarification applies to both cash flow and fair value hedging relationships. For public business entities, ASU 2016-05 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted including adoption in an interim period. The Company early adopted ASU 2016-05 beginning in April 1, 2016. Adoption of ASU 2016-05 did not have a material effect on the results of operations, financial position or cash flows of the Company.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes" ("ASU 2015-17"), which requires entities to present deferred tax assets ("DTAs") and deferred tax liabilities ("DTLs") as noncurrent in a classified balance sheet. ASU 2015-17 simplifies the current guidance, which requires entities to separately present DTAs and DTLs as current and noncurrent in a classified balance sheet. For public business entities, the amendments in ASU 2015-17 are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted as of the beginning of an interim or annual reporting period. The Company early adopted ASU 2015-17 beginning in April 1, 2016. Adoption of ASU 2015-17 did not have a material effect on the results of operations, financial position or cash flows of the Company.
In August 2015, the FASB issued ASU No. 2015-15, “Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” (“ASU 2015-15”). ASU 2015-15 incorporates into the ASC an SEC staff announcement that the SEC staff will not object to an entity presenting the cost of securing a revolving line of credit as an asset, regardless of whether a balance is outstanding. The standard, as issued, did not address revolving lines of credit, which may not have outstanding balances. An entity that repeatedly draws on a revolving credit facility and then repays the balance could present the cost as a deferred asset and reclassify all or a portion of it as a direct deduction from the liability whenever a balance is outstanding. However, the SEC staff’s announcement provides a less-cumbersome alternative. Either way, the cost should be amortized over the term of the arrangement. The Company adopted ASU 2015-15 beginning July 1, 2015. Adoption of ASU 2015-15 did not have a material effect on the results of operations, financial position or cash flows of the Company.
New Accounting Pronouncements
In May 2016, the FASB issued ASU No. 2016-12, "Revenue from Contracts with Customers (Topic 606); Identifying Performance Obligations and Licensing" ("ASU 2016-12"), which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. The amendments in ASU 2016-12 affect the guidance in ASU 2014-09, "Revenue From Contracts With Customers (Topic 606) ("ASU 2014-09") which is not yet effective. The effective date and transition requirements for the amendments in ASU 2016-12 are the same as the effective date and transition requirements in ASC 606 (and any other Topic amended by ASU 2014-09). ASU 2015-14, "Revenue From Contracts With Customers (Topic 606): Deferral of the Effective Date," ("ASU 2015-14"). defers the effective date of ASU 2014-09 by one year and, therefore, the deferral results in ASU 2014-09 and its amendment ASU 2016-12 being effective January 1, 2018.
In April 2016, the FASB issued ASU No. 2016-10 "Revenue from Contracts with Customers (Topic 606); Identifying Performance Obligations and Licensing" ("ASU 2016-10"), which clarifies guidance related to identifying performance obligations and licensing implementation guidance contained in the new revenue recognition standard. ASU 2016-10 seeks to pro-actively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis. The effective date and transition requirements for the amendments in ASU 2016-10 are the same as the effective date and transition requirements in ASU 2014-09, which is effective January 1, 2018.
In March 2016, the FASB issued ASU No. 2016-09, "Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting" ("ASU 2016-09"). ASU 2016-09 is being issued as part of the FASB's Simplification Initiative. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Some of the areas for simplification apply only to nonpublic entities. For public business entities, the amendments in ASU 2016-09 are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. ASU 2016-09 is effective for the Company beginning July 1, 2017. Adoption of ASU 2016-09 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)" ("ASU 2016-02"), which introduces a new lessee model that brings substantially all leases onto the balance sheet. In addition, while the new guidance retains most of the principles of the existing lessor model in GAAP, it aligns many of those principles with ASC 606, "Revenue From Contracts With Customers." For public business entities, ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early application is permitted. ASU
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
2016-02 is effective for the Company beginning July 1, 2019. Adoption of ASU 2016-02 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In September 2015, the FASB issued ASU No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). ASU 2015-16 eliminates the requirement that an acquirer in a business combination account for measurement-period adjustments retrospectively. Instead, an acquirer will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. The guidance is effective for public business entities for fiscal years, including interim periods within those fiscal years, beginning after December 15, 2015, with early adoption permitted. ASU 2015-16 is effective for the Company beginning July 1, 2016. Adoption of ASU 2015-16 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In July 2015, the FASB issued ASU No. 2015-12, “Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965), (Part I) Fully Benefit-Responsive Investment Contracts, (Part II) Plan Investment Disclosures, (Part III) Measurement Date Practical Expedient” ("ASU 2015-12”). ASU 2015-12 eliminates requirements that employee benefit plans measure the fair value of fully benefit-responsive investment contracts ("FBRICs") and provide the related fair value disclosures. As a result, FBRICs are measured, presented and disclosed only at contract value. Also, plans will be required to disaggregate their investments measured using fair value by general type, either on the face of the financial statements or in the notes, and self-directed brokerage accounts are one general type. Plans no longer have to disclose the net appreciation/depreciation in fair value of investments by general type or individual investments equal to or greater than 5% of net assets available for benefits. In addition, a plan with a fiscal year end that does not coincide with the end of a calendar month is allowed to measure its investments and investment-related accounts using the month end closest to its fiscal year end. The new guidance for FBRICs and plan investment disclosures should be applied retrospectively. The measurement date practical expedient should be applied prospectively. The guidance is effective for fiscal years beginning after December 15, 2015, with early adoption permitted. ASU 2015-12 is effective for the Company beginning July 1, 2016. Adoption of ASU 2015-12 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”). ASU 2015-11 simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Entities will continue to apply their existing impairment models to inventories that are accounted for using last-in first-out or LIFO and the retail inventory method or RIM. Under current guidance, net realizable value is one of several calculations an entity needs to make to measure inventory at the lower of cost or market. ASU 2015-11 is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, and the guidance must be applied prospectively after the date of adoption. ASU 2015-11 is effective for the Company beginning July 1, 2017. Adoption of ASU 2015-11 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In May 2015, the FASB issued ASU No. 2015-07, “Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)” (“ASU 2015-07”). ASU 2015-07 removes the requirement to categorize investments for which the fair values are measured using the net asset value per share practical expedient within the fair value hierarchy. It also limits certain disclosures to investments for which the entity has elected to measure the fair value using the practical expedient. ASU 2015-07 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015, with early adoption permitted. ASU 2015-07 is effective for the Company beginning July 1, 2016. The Company is in the process of assessing the impact of the adoption of ASU 2015-07 on its consolidated financial statements.
In May 2014, the FASB issued accounting guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers under ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. On July 9, 2015, the FASB issued ASU No. 2015-14, "Revenue From Contracts with Customers (Topic 606): Deferral of the Effective Date," which defers the effective date of ASU 2014-09 by one year allowing early adoption as of the original effective date of January 1, 2017. The deferral results in the new accounting standard being effective January 1, 2018. The Company is currently evaluating the impact of ASU 2014-09 on its results of operations, financial position and cash flows.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 2. Acquisition
On January 12, 2015, the Company acquired substantially all of the assets of Rae’ Launo Corporation (“RLC”) relating to its DSD and in-room distribution business in the Southeastern United States (the “RLC Acquisition”). The purchase price was $1.5 million, consisting of $1.2 million in cash paid at closing and earnout payments of up to $0.1 million that the Company expects to pay each year over a three-year period based on achievement of certain milestones.
The following table summarizes the estimated fair values of the assets acquired at the date of acquisition, based on the final purchase price allocation: |
| | | | | |
| Fair Values of Assets Acquired | | Estimated Useful Life (years) |
| (In thousands) | | | |
| Property, plant and equipment | $ | 338 |
| | |
| Intangible assets: | | | |
| Non-compete agreement | 20 |
| | 3.0 |
| Customer relationships | 870 |
| | 4.5 |
| Goodwill | 272 |
| | |
| Total assets acquired | $ | 1,500 |
| | |
Definite-lived intangible assets consist of a non-compete agreement and customer relationships. Total net carrying value of definite-lived intangible assets as of June 30, 2016 and 2015 was $0.6 million and $0.8 million, respectively, and accumulated amortization as of June 30, 2016 and 2015 was $0.3 million and $0.1 million, respectively. Estimated aggregate amortization of definite-lived intangible assets, calculated on a straight-line basis and based on estimated fair values is $0.2 million in each of the next three fiscal years commencing with fiscal 2017.
Note 3. Corporate Relocation Plan
On February 5, 2015, the Company announced a plan (the “Corporate Relocation Plan”) to close its Torrance, California facility and relocate its corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California to a new facility housing these operations currently under construction in Northlake, Texas (the “New Facility”). Approximately 350 positions were impacted as a result of the Torrance facility closure. The Company’s decision resulted from a comprehensive review of alternatives designed to make the Company more competitive and better positioned to capitalize on growth opportunities.
Based on current assumptions and subject to continued implementation of the Corporate Relocation Plan, the Company estimates that it will incur approximately $31 million in cash costs in connection with the exit of the Torrance facility consisting of $18 million in employee retention and separation benefits, $5 million in facility-related costs and $8 million in other related costs. Expenses related to the Corporate Relocation Plan in fiscal 2016 consisted of $9.7 million in employee retention and separation benefits, $3.7 million in facility-related costs including lease of temporary office space, costs associated with the move of the Company's headquarters and the relocation of certain distribution operations and $3.1 million in other related costs including travel, legal, consulting and other professional services. Facility-related costs also included $1.0 million in non-cash depreciation expense associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities.
Since adoption of the Corporate Relocation Plan through June 30, 2016, the Company has recognized a total of $25.7 million of the estimated $31 million in aggregate cash costs including $16.2 million in employee retention and separation benefits, $3.1 million in facility-related costs related to the relocation of the Company’s Torrance operations and certain distribution operations and $6.4 million in other related costs. The remainder is expected to be recognized in the first half of fiscal 2017. The Company also recognized from inception through fiscal 2016 $1.3 million in non-cash depreciation expense associated with the Torrance production facility. The Company may incur certain other non-cash asset impairment costs and pension-related costs in connection with the Corporate Relocation Plan.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table sets forth the activity in liabilities associated with the Corporate Relocation Plan for the fiscal year ended June 30, 2016: |
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Balances, June 30, 2015 | | Additions | | Payments | | Non-Cash Settled | | Adjustments | | Balances, June 30, 2016 |
| Employee-related costs(1) | $ | 6,156 |
| | $ | 9,730 |
| | $ | 13,544 |
| | $ | — |
| | $ | — |
| | $ | 2,342 |
|
| Facility-related costs(2) | — |
| | 3,716 |
| | 2,712 |
| | 1,004 |
| | — |
| | — |
|
| Other(3) | 200 |
| | 3,087 |
| | 3,087 |
| | — |
| | — |
| | 200 |
|
| Total(2) | $ | 6,356 |
| | $ | 16,533 |
| | $ | 19,343 |
| | $ | 1,004 |
| | $ | — |
| | $ | 2,542 |
|
| | | | | | | | | | | | |
| Current portion | $ | 6,356 |
| | | | | | | | | | $ | 2,542 |
|
| Non-current portion | $ | — |
| | | | | | | | | | $ | — |
|
| Total | $ | 6,356 |
| | | | | | | | | | $ | 2,542 |
|
_______________
(1) Included in “Accrued payroll expenses” on the Company's consolidated balance sheets.
(2) Non-cash settled facility-related costs represent depreciation expense associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and included in "Property, plant and equipment, net" on the Company's consolidated balance sheets.
(3) Included in “Accounts payable” on the Company's consolidated balance sheets.
Note 4. New Facility Lease Obligation
On July 17, 2015, the Company entered into a lease agreement, (as amended the “Lease Agreement”), pursuant to which the New Facility is being constructed by the lessor ("Lessor") at its expense, in accordance with agreed upon specifications and plans determined as set forth in the Lease Agreement. Based on the final budget, which reflects substantial completion of the principal design work for the New Facility, the Company estimates that the construction costs for the New Facility will be approximately $55 million to $60 million. The Company recorded an asset related to the New Facility lease obligation included in property, plant and equipment of $28.1 million at June 30, 2016 and an offsetting liability of $28.1 million for the lease obligation in "Other long-term liabilities" on its consolidated balance sheet at June 30, 2016 (see Note 19). Rent expense associated with the portion of the lease allocated to the land in the fiscal year ended June 30, 2016 and 2015 was $0.3 million and $0, respectively. Construction of and relocation to the New Facility is expected to be completed in the third quarter of fiscal 2017.
In conjunction with the Lease Agreement, the Company also entered into a Development Management Agreement (the “DMA”) pursuant to which an affiliate of Stream Realty Partners (“Developer”) has agreed to manage, coordinate, represent, assist and advise the Company on matters concerning the pre-development, development, design, entitlement, infrastructure, site preparation and construction of the New Facility. Pursuant to the DMA, the Company will pay Developer:
•a development fee of 3.25% of all development costs;
•an oversight fee of 2% of any amounts paid to the Company-contracted parties for any oversight by Developer of Company-contracted work;
•an incentive fee, the amount of which will be determined by the parties, if final completion occurs prior to the scheduled completion date; and
•an amount equal to $2.6 million as additional fee in respect of development services.
On June 15, 2016, the Company exercised the purchase option under the Lease Agreement to acquire the partially constructed New Facility. The estimated purchase option exercise price for the New Facility is $58.8 million based on the budget for the completed facility. The actual option exercise price for the partially constructed New Facility will depend
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
upon, among other things, the timing of the closing and the actual costs incurred for construction of the New Facility as of the purchase option closing date.
In addition to the costs to complete the construction of the New Facility, the Company estimates that it will incur $35 million to $39 million for machinery and equipment, furniture and fixtures and related expenditures. As of June 30, 2016, the Company had spent $4.4 million toward the purchase of machinery and equipment for the New Facility. No such capital expenditures were incurred in fiscal 2015. The majority of the capital expenditures associated with machinery and equipment, furniture, fixtures and related expenditures for the New Facility are expected to be incurred in the first half of fiscal 2017.
Note 5. Sale of Spice Assets
In order to focus on its core products, on December 8, 2015, the Company completed the sale of the Spice Assets to Harris. Harris acquired substantially all of the Company’s personal property used exclusively in connection with the Spice Assets, including certain equipment; trademarks, tradenames and other intellectual property assets; contract rights under sales and purchase orders and certain other agreements; and a list of certain customers, other than the Company’s DSD customers, and assumed certain liabilities relating to the Spice Assets. The Company received $6.0 million in cash at closing, and is eligible to receive an earnout amount of up to $5.0 million over a three year period based upon a percentage of certain institutional spice sales by Harris following the closing. The Company recognized $0.5 million in earnout during the fiscal year ended June 30, 2016, a portion of which is included in net gains from the sale of Spice Assets.
In connection with the sale of the Spice Assets, the Company and Harris entered into certain other agreements, including (1) a transitional co-packaging supply agreement pursuant to which the Company, as the contractor, provided Harris with certain transition services for a six-month transitional period following the closing of the asset sale, and (2) an exclusive supply agreement pursuant to which Harris will supply to the Company, after the closing of the asset sale, spice and culinary products that were previously manufactured by the Company on negotiated pricing terms. While title to the Spice Assets transferred at closing, certain of the assets purchased by Harris were transferred to Harris' own manufacturing facilities, in phases, during the transitional period. As of June 30, 2016, the Company completed all the agreed upon transitional services to Harris. The sale of the Spice Assets does not represent a strategic shift for the Company and is not expected to have a material impact on the Company's results of operations because the Company will continue to sell a complete portfolio of spice and other culinary products purchased from Harris under the supply agreement to its DSD customers.
Note 6. Assets Held for Sale
At June 30, 2016, the Company had listed for sale its Torrance facility and one of its branch properties in Northern California. The Company actively marketed these properties, entered into purchase and sale agreements with prospective buyers and expected these properties to be sold within one year. Accordingly, the Company designated these properties as assets held for sale and recorded the carrying values of these properties in the aggregate amount of $7.2 million as "Assets held for sale" on the Company's consolidated balance sheet at June 30, 2016. Subsequent to the year end the sale transaction for the Torrance facility was completed (see Note 24).
Note 7. Derivative Instruments
Derivative Instruments Held
Coffee-Related Derivative Instruments
The Company is exposed to commodity price risk associated with its PTF green coffee purchase contracts, which are described further in Note 1. The Company utilizes forward and option contracts to manage exposure to the variability in expected future cash flows from forecasted purchases of green coffee attributable to commodity price risk. Certain of these coffee-related derivative instruments utilized for risk management purposes have been designated as cash flow hedges, while other coffee-related derivative instruments have not been designated as cash flow hedges or do not qualify for hedge accounting despite hedging the Company's future cash flows on an economic basis.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| |
| Item 9A. | Controls and Procedures |
The following table summarizesDisclosure Controls and Procedures
Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the notional volumes forExchange Act, are controls and other procedures that are designed to ensure that information required to be disclosed by us in the coffee-related derivative instruments held byreports that we file or submit under the Company atExchange 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,
20162019, our management, with the participation of our Chief Executive Officer and
2015: |
| | | | | | |
| | | June 30, |
| (In thousands) | | 2016 | | 2015 |
| Derivative instruments designated as cash flow hedges: | | | | |
| Long coffee pounds | | 32,550 |
| | 32,288 |
|
| Derivative instruments not designated as cash flow hedges: | | | | |
| Long coffee pounds | | 1,618 |
| | 1,954 |
|
| Less: Short coffee pounds | | (188 | ) | | — |
|
| Total | | 33,980 |
| | 34,242 |
|
Coffee-related derivative instruments designated as cash flow hedges outstandingChief 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 that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2016 will expire within 18 months.2019, our disclosure controls and procedures are effective.
Effect of Derivative Instruments onChanges 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 Financial Statements
Balance Sheets
Fair values of derivative instruments on the consolidated balance sheets: |
| | | | | | | | | | | | | | | | |
| | | Derivative Instruments Designated as Cash Flow Hedges | | Derivative Instruments Not Designated as Accounting Hedges |
| | | June 30, | | June 30, |
| (In thousands) | | 2016(1) | | 2015(2) | | 2016(1) | | 2015(2) |
| Financial Statement Location: | | | | | | | | |
| Short-term derivative assets: | | | | | | | | |
| Coffee-related derivative instruments | | $ | 3,771 |
| | $ | 128 |
| | $ | 183 |
| | $ | 25 |
|
| Long-term derivative assets: | | | | | | | | |
| Coffee-related derivative instruments | | $ | 2,575 |
| | $ | 136 |
| | $ | 57 |
| | $ | 2 |
|
| Short-term derivative liabilities: | | | | | | | | |
| Coffee-related derivative instruments | | $ | — |
| | $ | 4,128 |
| | $ | — |
| | $ | 2 |
|
| Long-term derivative liabilities: | | | | | | | | |
| Coffee-related derivative instruments | | $ | — |
| | $ | 163 |
| | $ | — |
| | $ | — |
|
________________
(1) Included in "Short-term derivative assets" and "Other assets" on the Company's consolidated balance sheet at June 30, 2016.
(2) Included in "Short-term derivative liabilities" and "Other long-term liabilities" on the Company's consolidated balance sheet at June 30, 2015.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Statements of Operations
The following table presents pretax net gains and losses for the Company's coffee-related derivative instruments designated as cash flow hedges, as recognized in “AOCI,” “Cost of goods sold” and “Other, net”: |
| | | | | | | | | | | | | | |
| | | Year Ended June 30, | Financial Statement Classification |
| (In thousands) | | 2016 | | 2015 | | 2014 | |
| Net gains (losses) recognized in accumulated other comprehensive income (loss) (effective portion) | | $ | 303 |
| | $ | (14,295 | ) | | $ | 17,524 |
| | AOCI |
| Net (losses) gains recognized in earnings (effective portion) | | $ | (13,184 | ) | | $ | 4,211 |
| | $ | 1,161 |
| | Costs of goods sold |
| Net losses recognized in earnings (ineffective portion) | | $ | (575 | ) | | $ | (325 | ) | | $ | (259 | ) | | Other, net |
For the yearsExchange Act) during our fiscal quarter ended June 30, 2016, 20152019, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and 2014, there were no gains or losses recognizedmaintaining adequate internal control over financial reporting for the Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in earnings as a result of excluding amounts from the assessment of hedge effectiveness or as a result of reclassifications to earnings following the discontinuance of any cash flow hedges.
Gains and losses on derivative instruments not designated asaccordance with accounting hedges are included in “Other, net”principles generally accepted in the Company'sUnited States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our consolidated financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our consolidated financial statements would be prevented or detected on a timely basis. Because of operations andits inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a material misstatement of our consolidated financial statements would be prevented or detected.
Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in “Net losses (gains)Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on derivative instruments and investments” inthis evaluation, management concluded that the Company's consolidated statements of cash flows.
Net gains and losses recorded in “Other, net” are as follows: |
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Net (losses) gains on coffee-related derivative instruments | | $ | (298 | ) | | $ | (2,992 | ) | | $ | 2,655 |
|
| Net gains (losses) on investments | | 611 |
| | (270 | ) | | 464 |
|
| Net losses on interest rate swap | | — |
| | — |
| | (5 | ) |
| Net gains (losses) on derivative instruments and investments(1) | | 313 |
| | (3,262 | ) | | 3,114 |
|
| Other gains, net | | 243 |
| | 248 |
| | 563 |
|
| Other, net | | $ | 556 |
| | $ | (3,014 | ) | | $ | 3,677 |
|
___________
(1) Excludes net (losses) gains on coffee-related derivative instruments designated as cash flow hedges recorded in cost of goods sold in the fiscal years ended June 30, 2016, 2015 and 2014.
Offsetting of Derivative Assets and Liabilities
The Company has agreements in place that allow for theinternal control over financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, the Company maintains accounts with its brokers to facilitate financial derivative transactions in support of its risk management activities. Based on the value of the Company’s positions in these accounts and the associated margin requirements, the Company may be required to deposit cash into these broker accounts.
The following table presents the Company’s net exposure from its offsetting derivative asset and liability positions, as well as cash collateral on deposit with its counterparty as of the reporting dates indicated: |
| | | | | | | | | | | | | | | | | | |
| (In thousands) | | | | Gross Amount Reported on Balance Sheet | | Netting Adjustments | | Cash Collateral Posted | | Net Exposure |
| June 30, 2016 | | Derivative Assets | | $ | 6,586 |
| | $ | — |
| | $ | — |
| | $ | 6,586 |
|
| June 30, 2015 | | Derivative Assets | | $ | 291 |
| | $ | (291 | ) | | $ | — |
| | $ | — |
|
| | | Derivative Liabilities | | $ | 4,292 |
| | $ | (291 | ) | | $ | 1,001 |
| | $ | 3,000 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Cash Flow Hedges
Changes in the fair value of the Company's coffee-related derivative instruments designated as cash flow hedges, to the extentwas effective are deferred in AOCI and reclassified into cost of goods sold in the same period or periods in which the hedged forecasted purchases affect earnings, or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. Based on recorded values at June 30, 2016, $2.0 million of net gains on coffee-related derivative instruments designated as cash flow hedges are expected to be reclassified into cost of goods sold within the next twelve months. These recorded values are based on market prices of the commodities as of June 30, 2016. Due2019. The Company's independent registered public accounting firm, Deloitte & Touche LLP, has issued an audit report on the effectiveness of the Company's internal control over financial reporting. Their report follows.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Farmer Bros. Co.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Farmer Bros. Co. and subsidiaries (the “Company”) as of June 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended June 30, 2019, of the Company and our report dated September 10, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the volatile natureCompany in accordance with the U.S. federal securities laws and the applicable rules and regulations of commodity prices, actual gainsthe Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in 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.
Definition and Limitations of Internal Control over Financial Reporting
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 dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or losses realized withintimely detection of unauthorized acquisition, use, or disposition of the next twelve months will likely differ from these values.company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections 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.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
September 10, 2019
Note 8. Investments
The following table shows gains and losses on trading securities held for investment by the Company:
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Total gains (losses) recognized from trading securities held for investment | | $ | 611 |
| | $ | (270 | ) | | $ | 464 |
|
| Less: Realized gains from sales of trading securities held for investment | | 29 |
| | 89 |
| | 116 |
|
| Unrealized gains (losses) from trading securities held for investment | | $ | 582 |
| | $ | (359 | ) | | $ | 348 |
|
Note 9. Fair Value Measurements
Assets and liabilities measured and recorded at fair value on a recurring basis were as follows:
|
| | | | | | | | | | | | | | | | |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 |
| June 30, 2016 | | | | | | | | |
| Preferred stock(1) | | $ | 25,591 |
| | $ | 21,976 |
| | $ | 3,615 |
| | $ | — |
|
| Derivative instruments designated as cash flow hedges: | | | | | | | | |
| Coffee-related derivative assets(2) | | $ | 6,346 |
| | $ | — |
| | $ | 6,346 |
| | $ | — |
|
| Coffee-related derivative liabilities(2) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Derivative instruments not designated as accounting hedges: | | | | | | | | |
| Coffee-related derivative assets(2) | | $ | 240 |
| | $ | — |
| | $ | 240 |
| | $ | — |
|
| Coffee-related derivative liabilities(2) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | | | | | | | |
| | | Total | | Level 1 | | Level 2 | | Level 3 |
| June 30, 2015 | | | | | | | | |
| Preferred stock(1) | | $ | 23,665 |
| | $ | 19,132 |
| | $ | 4,533 |
| | $ | — |
|
| Derivative instruments designated as cash flow hedges: | | | | | | | | |
| Coffee-related derivative assets(2) | | $ | 264 |
| | $ | — |
| | $ | 264 |
|
| $ | — |
|
| Coffee-related derivative liabilities(2) | | $ | 4,290 |
| | $ | — |
| | $ | 4,290 |
| | $ | — |
|
| Derivative instruments not designated as accounting hedges: | | | | | | | | |
| Coffee-related derivative assets(2) | | $ | 27 |
| | $ | — |
| | $ | 27 |
| | $ | — |
|
| Coffee-related derivative liabilities(2) | | $ | 2 |
| | $ | — |
| | $ | 2 |
| | $ | — |
|
| | | | | | | | | |
____________________
|
| |
(1)Item 9B. | Included in “Short-term investments” on the Company's consolidated balance sheets.Other Information |
| |
(2) | The Company's coffee derivative instruments are traded over-the-counter and, therefore, classified as Level 2. |
During the fiscal year ended June 30, 2016, there was one transfer of preferred stock from Level 1 to Level 2, resulting from a decrease in the quantity and quality of information related to trading activity and broker quotes for that security.The
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Company's coffee derivative instruments that were previously classified as Level 1 were appropriately reclassified as Level 2 because they are traded over-the-counter.None
Note 10. Accounts and Notes Receivable, Net |
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2016 | | 2015 |
| Trade receivables | | $ | 43,113 |
| | $ | 38,783 |
|
| Other receivables(1) | | 1,965 |
| | 2,021 |
|
| Allowance for doubtful accounts | | (714 | ) | | (643 | ) |
| Accounts and notes receivable, net | | $ | 44,364 |
| | $ | 40,161 |
|
__________
(1) At June 30, 2016 and 2015, respectively, the Company had recorded $0.5 million and $0 in "Other receivables" included in "Accounts and notes receivable, net" on its consolidated balance sheets representing earnout receivable from Harris.PART III
Allowance for doubtful accounts:
|
| | | |
| (In thousands) | |
| Balance at June 30, 2013 | $ | (1,115 | ) |
| Provision | (80 | ) |
| Reclassification to long-term | 544 |
|
| Balance at June 30, 2014 | $ | (651 | ) |
| Recovery | 8 |
|
| Balance at June 30, 2015 | $ | (643 | ) |
| Provision | (71 | ) |
| Write-off | $ | — |
|
| Balance at June 30, 2016 | $ | (714 | ) |
|
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2016 | | 2015 |
| Coffee | | | | |
| Processed | | $ | 12,362 |
| | $ | 13,837 |
|
| Unprocessed | | 13,534 |
| | 11,968 |
|
| Total | | $ | 25,896 |
| | $ | 25,805 |
|
| Tea and culinary products | | | | |
| Processed | | $ | 15,384 |
| | $ | 17,022 |
|
| Unprocessed | | 377 |
| | 2,764 |
|
| Total | | $ | 15,761 |
| | $ | 19,786 |
|
| Coffee brewing equipment parts | | $ | 4,721 |
| | $ | 4,931 |
|
| Total inventories | | $ | 46,378 |
| | $ | 50,522 |
|
In addition to product cost, inventory costs include expenditures such as direct labor and certain supply and overhead expenses incurred in bringing the inventory to its existing condition and location. The “Unprocessed” inventory values as stated in the above table represent the value of raw materials and the “Processed” inventory values represent all other products consisting primarily of finished goods.
Inventories decreased at the end of fiscal 2016 compared to fiscal 2015, primarily due to production consolidation and the sale of processed and unprocessed inventories to Harris at cost upon conclusion of the transition services provided by the
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Company in connection with the sale of the Spice Assets. Inventories decreased at the end of fiscal 2015 compared to fiscal 2014, primarily due to the consolidation of the Company's Torrance coffee production with its coffee production in Houston and Portland as part of the Corporate Relocation Plan. As a result, the Company recorded in cost of goods sold $4.2 million and $4.9 million in beneficial effect of liquidation of LIFO inventory quantities in the fiscal year ended June 30, 2016 and 2015, respectively, which increased net income for the fiscal years ended June 30, 2016 and 2015 by $4.2 million and $4.9 million, respectively. Inventories increased at the end of fiscal 2014 compared to fiscal 2013 and, therefore, there was no similar benefit to cost of goods sold in fiscal 2014.
Current cost of coffee, tea and culinary product inventories exceeds the LIFO cost by: |
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2016 | | 2015 |
| Coffee | | $ | 14,462 |
| | $ | 25,541 |
|
| Tea and culinary products | | 7,139 |
| | 8,200 |
|
| Total | | $ | 21,601 |
| | $ | 33,741 |
|
Note 12. Property, Plant and Equipment |
| |
| Item 10. | Directors, Executive Officers and Corporate Governance |
|
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2016 | | 2015 |
| Buildings and facilities | | $ | 54,768 |
| | $ | 79,040 |
|
| Machinery and equipment | | 182,227 |
| | 172,432 |
|
| Buildings and facilities—New Facility(1) | | 28,110 |
| | — |
|
| Equipment under capital leases | | 11,982 |
| | 18,562 |
|
| Capitalized software | | 21,545 |
| | 19,703 |
|
| Office furniture and equipment | | 16,077 |
| | 15,005 |
|
| | | $ | 314,709 |
| | $ | 304,742 |
|
| Accumulated depreciation | | (206,162 | ) | | (223,660 | ) |
| Land | | 9,869 |
| | 9,119 |
|
| Property, plant and equipment, net(2) | | $ | 118,416 |
| | $ | 90,201 |
|
______________
(1) Asset recorded to offset New Facility lease obligation recorded in "Other long-term liabilities" (see Note 19).(2) IncludesThe information required by this item will be set forth in the yearsProxy Statement and is incorporated in this report by reference.
Code of Conduct and Ethics
We maintain a written Code of Conduct and Ethics for all employees, officers and directors, including our principal executive officer, principal financial officer, principal accounting officer or controller, and other persons performing similar functions. To view this Code of Conduct and Ethics free of charge, please visit our website at www.farmerbros.com. We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Conduct and Ethics, if any, by posting such information on our website as set forth above.
Compliance with Section 16(a) of the Exchange Act
To the Company’s knowledge, based solely on a review of the copies of such reports furnished to the Company and written representations from certain reporting persons that no other reports were required during the fiscal year ended June 30, 20162019, its officers, directors and 2015, expenditures for itemsten percent stockholders complied with all applicable Section 16(a) filing requirements. The foregoing is in addition to any filings that have not been placed in servicemay be listed in the amounts of $39.3 millionCompany's Proxy Statement expected to be dated and $2.5 million, respectively.
Capital leases consisted mainly of vehicle leases at June 30, 2016 and 2015. Depreciation and amortization expense includes amortization expense for assets recorded under capitalized leases.
The Company capitalized coffee brewing equipment (included in machinery and equipment) in the amounts of $8.4 million and $10.7 million in fiscal 2016 and 2015, respectively. Depreciation expense related to the capitalized coffee brewing equipment reported as cost of goods sold was $9.8 million, $10.4 million and $10.9 million in fiscal 2016, 2015 and 2014, respectively.
The Company may incur certain other non-cash asset impairment costs in connectionfiled with the Corporate Relocation Plan.
Maintenance and repairs to property, plant and equipment charged to expense forSEC not later than 120 days after the yearsconclusion of the Company's fiscal year ended June 30, 2016, 2015, and 2014 were $7.7 million, $8.2 million and $8.7 million, respectively.2019.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 13. Goodwill and Intangible Assets
The following is a summary of changes in the carrying value of goodwill: |
| | | | |
| (In thousands) |
| Balance at June 30, 2014 | | $ | — |
|
| Additions—RLC acquisition | | 272 |
|
| Balance at June 30, 2015 | | $ | 272 |
|
| Additions | | — |
|
| Balance at June 30, 2016 | | $ | 272 |
|
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 two fiscal years.
|
| | | | | | | | | | | | | | | | |
| | | June 30, 2016 | | June 30, 2015 |
| (In thousands) | | Gross Carrying Amount | | Accumulated Amortization | | Gross Carrying Amount | | Accumulated Amortization |
| Amortized intangible assets: | | | | | | | | |
| Customer relationships | | $ | 10,953 |
| | $ | (10,373 | ) | | $ | 10,953 |
| | $ | (10,179 | ) |
| Covenant not to compete | | 20 |
| | (10 | ) | | 20 |
| | (3 | ) |
| Total amortized intangible assets | | $ | 10,973 |
| | $ | (10,383 | ) | | $ | 10,973 |
| | $ | (10,182 | ) |
| Unamortized intangible assets: | | | | | | | | |
| Tradenames with indefinite lives | | $ | 3,640 |
| | $ | — |
| | $ | 3,640 |
| | $ | — |
|
| Trademarks with indefinite lives | | 1,988 |
| | — |
| | 1,988 |
| | — |
|
| Total unamortized intangible assets | | $ | 5,628 |
| | $ | — |
| | $ | 5,628 |
| | $ | — |
|
| Total intangible assets | | $ | 16,601 |
| | $ | (10,383 | ) | | $ | 16,601 |
| | $ | (10,182 | ) |
Aggregate amortization expense for the past three fiscal years:
|
| | | | | | | | | | |
(In thousands): | | |
| For the fiscal year ended June 30, 2016 | | $ | 200 |
|
| For the fiscal year ended June 30, 2015 | | $ | 99 |
|
| For the fiscal year ended June 30, 2014 | | $ | 649 |
|
Estimated amortization expense for the next three fiscal years:
|
| | | | | | | | | | |
| (In thousands): | | |
| For the fiscal year ending June 30, 2017 | | $ | 200 |
|
| For the fiscal year ending June 30, 2018 | | $ | 198 |
|
| For the fiscal year ending June 30, 2019 | | $ | 193 |
|
Remaining weighted average amortization periods for intangible assets with finite lives are as follows:
|
| | | | | | | | |
Customer relationships (years)Item 11. | | 3.0 |
Covenant not to compete (years) | | 1.5Executive Compensation |
The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.
Note 14. Employee Benefit Plans |
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The Company provides benefitinformation required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.
Equity Compensation Plan Information
Information about our equity compensation plans for most full-time employees, including 401(k), health and other welfare benefit plans and, in certain circumstances, pension benefits. Generally the plans provide benefits based on years of service and/or a
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
combination of years of service and earnings. In addition, the Company contributes to two multiemployer defined benefit pension plans, one multiemployer defined contribution pension plan and ten multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. In addition, the Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees and provides retiree medical coverage and, depending on the age of the retiree, dental and vision coverage. The Company also provides a postretirement death benefit to certain of its employees and retirees.
The Company is required to recognize the funded status of a benefit plan in its consolidated balance sheets. The Company is also required to recognize in other comprehensive income (loss) (“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. Co. Pension Plan for Salaried Employees (the “Farmer Bros. Plan”), for Company employees hired prior to January 1, 2010, who are not covered under a collective bargaining agreement. The Company amended the Farmer Bros. Plan, freezing the benefit for all participants effectiveat June 30, 2011. After the plan freeze, participants do2019 that were either approved or not accrue any benefits under the Farmer Bros. Plan, and new hires are not eligible to participate in the Farmer Bros. Plan. As all plan participants became inactive following this pension 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 pension plans for certain hourly employees covered under collective bargaining agreements (the “Brewmatic Plan” and the “Hourly Employees' Plan”). In fiscal 2015, the Company actuarially determined that no adjustments were required to be made to fiscal 2015 net periodic benefit cost for the defined benefit pension plansapproved by our stockholders was as a result of the Company's Corporate Relocation Plan.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Obligations and Funded Statusfollows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Farmer Bros. Plan June 30, | | Brewmatic Plan June 30, | | Hourly Employees’ Plan June 30, |
| ($ in thousands) | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 |
| Change in projected benefit obligation | | | | | | | | | | | | |
| Benefit obligation at the beginning of the year | | $ | 136,962 |
| | $ | 133,136 |
| | $ | 4,064 |
| | $ | 3,991 |
| | $ | 3,145 |
| | $ | 2,619 |
|
| Service cost | | — |
| | — |
| | — |
| | — |
| | 389 |
| | 386 |
|
| Interest cost | | 5,875 |
| | 5,393 |
| | 172 |
| | 160 |
| | 137 |
| | 108 |
|
| Actuarial loss | | 15,999 |
| | 4,596 |
| | 682 |
| | 188 |
| | 687 |
| | 56 |
|
| Benefits paid | | (6,511 | ) | | (6,163 | ) | | (344 | ) | | (275 | ) | | (29 | ) | | (24 | ) |
| Projected benefit obligation at the end of the year | | $ | 152,325 |
| | $ | 136,962 |
| | $ | 4,574 |
| | $ | 4,064 |
| | $ | 4,329 |
| | $ | 3,145 |
|
| Change in plan assets | | | | | | | | | | | | |
| Fair value of plan assets at the beginning of the year | | 94,815 |
| | $ | 98,426 |
| | $ | 3,291 |
| | $ | 3,435 |
| | $ | 2,104 |
| | $ | 1,629 |
|
| Actual return on plan assets | | 1,556 |
| | 1,731 |
| | 42 |
| | 66 |
| | 85 |
| | 10 |
|
| Employer contributions | | 1,341 |
| | 821 |
| | — |
| | 65 |
| | 287 |
| | 489 |
|
| Benefits paid | | (6,511 | ) | | (6,163 | ) | | (344 | ) | | (275 | ) | | (29 | ) | | (24 | ) |
| Fair value of plan assets at the end of the year | | $ | 91,201 |
| | $ | 94,815 |
| | $ | 2,989 |
| | $ | 3,291 |
| | $ | 2,447 |
| | $ | 2,104 |
|
| Funded status at end of year (underfunded) overfunded | | (61,124 | ) | | $ | (42,147 | ) | | (1,585 | ) | | $ | (773 | ) | | $ | (1,882 | ) | | $ | (1,041 | ) |
| Amounts recognized in consolidated balance sheets | | | | | | | | | | | | |
| Non-current liabilities | | (61,124 | ) | | (42,147 | ) | | (1,585 | ) | | (773 | ) | | (1,882 | ) | | (1,041 | ) |
| Total | | $ | (61,124 | ) | | $ | (42,147 | ) | | $ | (1,585 | ) | | $ | (773 | ) | | $ | (1,882 | ) | | $ | (1,041 | ) |
| Amounts recognized in consolidated statements of operations | | | | | | | | | | | | |
| Net loss | | 70,246 |
| | $ | 50,743 |
| | 2,756 |
| | $ | 1,965 |
| | 988 |
| | $ | 237 |
|
| Total accumulated OCI (not adjusted for applicable tax) | | $ | 70,246 |
| | $ | 50,743 |
| | $ | 2,756 |
| | $ | 1,965 |
| | $ | 988 |
| | $ | 237 |
|
| Weighted average assumptions used to determine benefit obligations | | | | | | | | | | | | |
| Discount rate | | 3.55 | % | | 4.40 | % | | 3.55 | % | | 4.40 | % | | 3.55 | % | | 4.40 | % |
| Rate of compensation increase | | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
|
| | | | | | |
| 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) | | 491,301 | | $26.22 | | 740,429 |
| Equity compensation plans not approved by stockholders | | — | | — | | — |
| Total | | 491,301 | | $26.22 | | 740,429 |
________________
(1) Includes shares issued under 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) Includes 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 2017 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 150% of the target number of PBRSUs depending on the extent to which the Company meets or exceeds the achievement of the applicable financial performance goals.
(3) Does not include outstanding PBRSUs.
| |
| (4) | The 2017 Plan authorizes the issuance of (i) 900,000 shares of common stock plus (ii) the number of shares of common stock subject to awards under the Company’s Prior Plans that are outstanding as of the Effective Date and that expire or are forfeited, cancelled or similarly lapse following the Effective Date. Subject to certain limitations, shares of common stock covered by awards granted under the 2017 Plan that are forfeited, expire or lapse, or are repurchased for or paid in cash, may be used again for new grants under the 2017 Plan. Shares of common stock granted under the 2017 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares. In no event will more than 900,000 shares of common stock be issuable pursuant to the exercise of incentive stock options under the 2017 Plan. The 2017 Plan 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. |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Components of Net Periodic Benefit Cost and
Other Changes Recognized in Other Comprehensive Income (Loss) (OCI)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Farmer Bros. Plan June 30, | | Brewmatic Plan June 30, | | Hourly Employees’ Plan June 30, |
| ($ in thousands) | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 |
| Components of net periodic benefit cost | | | | | | | | | | | | |
| Service cost | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 389 |
| | $ | 386 |
|
| Interest cost | | 5,875 |
| | 5,393 |
| | 172 |
| | 160 |
| | 137 |
| | 108 |
|
| Expected return on plan assets | | (6,470 | ) | | (6,938 | ) | | (219 | ) | | (234 | ) | | (149 | ) | | (119 | ) |
| Amortization of net loss | | 1,411 |
| | 1,153 |
| | 68 |
| | 57 |
| | — |
| | — |
|
| Net periodic benefit cost (credit) | | $ | 816 |
| | $ | (392 | ) | | $ | 21 |
| | $ | (17 | ) | | $ | 377 |
| | $ | 375 |
|
| Other changes recognized in OCI | | | | | | | | | | | | |
| Net loss | | $ | 20,913 |
| | $ | 9,803 |
| | $ | 859 |
| | $ | 356 |
| | $ | 750 |
| | $ | 165 |
|
| Amortization of net loss | | (1,411 | ) | | (1,153 | ) | | (68 | ) | | (57 | ) | | — |
| | — |
|
| Total recognized in OCI | | $ | 19,502 |
| | $ | 8,650 |
| | $ | 791 |
| | $ | 299 |
| | $ | 750 |
| | $ | 165 |
|
| Total recognized in net periodic benefit cost and OCI | | $ | 20,318 |
| | $ | 8,258 |
| | $ | 812 |
| | $ | 282 |
| | $ | 1,127 |
| | $ | 540 |
|
| Weighted-average assumptions used to determine net periodic benefit cost | | | | | | | | | | | | |
| Discount rate | | 4.40 | % | | 4.15 | % | | 4.40 | % | | 4.15 | % | | 4.40 | % | | 4.15 | % |
| Expected long-term return on plan assets | | 7.50 | % | | 7.50 | % | | 7.50 | % | | 7.50 | % | | 7.50 | % | | 7.50 | % |
| Rate of compensation increase | | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
Basis Used to Determine Expected Long-term Return on Plan Assets
The expected long-term return on plan assets assumption was developed as a weighted average rate based on the target asset allocation of the plan and the Long-Term Capital Market Assumptions (CMA) 2014. The capital market assumptions were developed with a primary focus on forward-looking valuation models and market indicators. The key fundamental economic inputs for these models are future inflation, economic growth, and interest rate environment. Due to the long-term nature of the pension obligations, the investment horizon for the CMA 2014 is 20 to 30 years. In addition to forward-looking models, historical analysis of market data and trends was reflected, as well as the outlook of recognized economists, organizations and consensus CMA from other credible studies.
Description of Investment Policy
The Company’s investment strategy is to build an efficient, well-diversified portfolio based on a long-term, strategic outlook of the investment markets. The investment markets outlook utilizes both the historical-based and forward-looking return forecasts to establish future return expectations for various asset classes. These return expectations are used to develop a core asset allocation based on the specific needs of each plan. The core asset allocation utilizes investment portfolios of various asset classes and multiple investment managers in order to maximize the plan’s return while providing multiple layers of diversification to help minimize risk.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Farmer Bros. Plan June 30, | | Brewmatic Plan June 30, | | Hourly Employees’ Plan June 30, |
| ($ in thousands) | | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 |
| Comparison of obligations to plan assets | | | | | | | | | | | | |
| Projected benefit obligation | | $ | 152,325 |
| | $ | 136,962 |
| | $ | 4,574 |
| | $ | 4,064 |
| | $ | 4,329 |
| | $ | 3,145 |
|
| Accumulated benefit obligation | | $ | 152,325 |
| | $ | 136,962 |
| | $ | 4,574 |
| | $ | 4,064 |
| | $ | 4,329 |
| | $ | 3,145 |
|
| Fair value of plan assets at measurement date | | $ | 91,201 |
| | $ | 94,815 |
| | $ | 2,989 |
| | $ | 3,291 |
| | $ | 2,447 |
| | $ | 2,104 |
|
| Plan assets by category | | | | | | | | | | | | |
| Equity securities | | $ | 58,094 |
| | $ | 47,340 |
| | $ | 1,909 |
| | $ | 1,638 |
| | $ | 1,542 |
| | $ | 1,050 |
|
| Debt securities | | 27,586 |
| | 37,789 |
| | 899 |
| | 1,322 |
| | 758 |
| | 839 |
|
| Real estate | | 5,521 |
| | 9,686 |
| | 181 |
| | 331 |
| | 147 |
| | 215 |
|
| Total | | $ | 91,201 |
| | $ | 94,815 |
| | $ | 2,989 |
| | $ | 3,291 |
| | $ | 2,447 |
| | $ | 2,104 |
|
| Plan assets by category | | | | | | | | | | | | |
| Equity securities | | 64 | % | | 50 | % | | 64 | % | | 50 | % | | 63 | % | | 50 | % |
| Debt securities | | 30 | % | | 40 | % | | 30 | % | | 40 | % | | 31 | % | | 40 | % |
| Real estate | | 6 | % | | 10 | % | | 6 | % | | 10 | % | | 6 | % | | 10 | % |
| Total | | 100.0 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Fair values of plan assets were as follows:
|
| | | | | | | | | | | | | | | | |
| | | June 30, 2016 |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 |
| Farmer Bros. Plan | | $ | 91,201 |
| | $ | — |
| | $ | 91,201 |
| | $ | — |
|
| Brewmatic Plan | | $ | 2,989 |
| | $ | — |
| | $ | 2,989 |
| | $ | — |
|
| Hourly Employees’ Plan | | $ | 2,447 |
| | $ | — |
| | $ | 2,447 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | |
| | | June 30, 2015 |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 |
| Farmer Bros. Plan | | $ | 94,815 |
| | $ | — |
| | $ | 94,815 |
| | $ | — |
|
| Brewmatic Plan | | $ | 3,291 |
| | $ | — |
| | $ | 3,291 |
| | $ | — |
|
| Hourly Employees’ Plan | | $ | 2,104 |
| | $ | — |
| | $ | 2,104 |
| | $ | — |
|
As of June 30, 2016, approximately 6% of the assets of each of the Farmer Bros. Plan, the Brewmatic Plan and the Hourly Employees’ Plan were invested in pooled separate accounts which invested mainly in commercial real estate and included mortgage loans which were backed by the associated properties. These underlying real estate investments are able to be redeemed at net asset value per share and therefore, are considered Level 2 assets.
The following is the target asset allocation for the Company's single employer pension plans—Farmer Bros. Plan, Brewmatic Plan and Hourly Employees' Plan—for fiscal 2017: |
| | |
| Item 13. | Fiscal 2017 |
U.S. large cap equity securities | 42.8 | % |
U.S. small cap equity securities | 5.2 | % |
International equity securities | 16.0 | % |
Debt securities | 30.0 | % |
Real estate | 6.0 | % |
Total | 100.0 | %Certain Relationships and Related Transactions, and Director Independence |
The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Estimated Amounts in OCI Expected To Be Recognized
In fiscal 2017, the Company expects to recognize as a component of net periodic benefit cost $1.1 million for the Farmer Bros. Plan, $71,000 for the Brewmatic Plan, and $0.5 million for the Hourly Employees’ Plan.
Estimated Future Contributions and Refunds
In fiscal 2017, the Company expects to contribute $2.0 million to the Farmer Bros. Plan, $0.1 million to the Brewmatic Plan, and $0.3 million to the Hourly Employees’ Plan. The Company is not aware of any refunds expected from single employer pension plans.
Estimated Future Benefit Payments
The following benefit payments are expected to be paid over the next 10 fiscal years: |
| | | | | | | | | | | | |
| (In thousands) | | Farmer Bros. Plan | | Brewmatic Plan | | Hourly Employees’ Plan |
| Year Ending: | | |
| June 30, 2017 | | $ | 7,310 |
| | $ | 320 |
| | $ | 81 |
|
| June 30, 2018 | | $ | 7,520 |
| | $ | 310 |
| | $ | 110 |
|
| June 30, 2019 | | $ | 7,760 |
| | $ | 310 |
| | $ | 120 |
|
| June 30, 2020 | | $ | 8,040 |
| | $ | 300 |
| | $ | 140 |
|
| June 30, 2021 | | $ | 8,250 |
| | $ | 290 |
| | $ | 170 |
|
| June 30, 2022 to June 30, 2026 | | $ | 42,770 |
| | $ | 1,340 |
| | $ | 1,170 |
|
These amounts are based on current data and assumptions and reflect expected future service, as appropriate.
Multiemployer Pension Plans
The Company participates in two multiemployer defined benefit pension plans that are union sponsored and collectively bargained for the benefit of certain employees subject to collective bargaining agreements, of which the Western Conference of Teamsters Pension Plan (“WCTPP”) is individually significant. The Company makes contributions to these plans generally based on the number of hours worked by the participants in accordance with the provisions of negotiated labor contracts.
The risks of participating in multiemployer pension plans are different from single-employer plans in that: (i) assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (iii) if the Company stops participating in the multiemployer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Company's participation in WCTPP is outlined in the table below. The Pension Protection Act (“PPA”) Zone Status available in the Company's fiscal year 2016 and fiscal year 2015 is for the plan's year ended December 31, 2015 and December 31, 2014, 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 91.7% and 91.9% funded for its plan year beginning January 1, 2015 and 2014, 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, 2015 | | July 1,
2014
| |
|
| Western Conference of Teamsters Pension Plan | | 91-6145047 | | 001 | | Green | | Green | | No | | No | | January 31, 2020 |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
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 $9.1 million if the withdrawal had occurred in calendar year 2015. 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 2015 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 ending with the plan year in which the withdrawal occurred 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.
In fiscal 2012, the Company withdrew from the Local 807 Labor-Management Pension Fund (“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. On November 18, 2014, the Pension Fund sent the Company a notice of assessment of withdrawal liability in the amount of $4.4 million, which the Pension Fund adjusted to $4.9 million on January 5, 2015. The Company is in the process of negotiating a reduced liability amount. The Company has commenced quarterly installment payments to the Pension Fund of $91,000 pending the final settlement of the liability. The total estimated withdrawal liability of $3.8 million and $4.3 million, respectively, is reflected in the Company's consolidated balance sheets at June 30, 2016 and June 30, 2015, with the short-term and long-term portions reflected in current and long-term liabilities, respectively.
The Company may incur certain pension-related costs in connection with the Corporate Relocation Plan. 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) |
| Year Ended: | | | | |
| June 30, 2016 | | $ | 2,587 |
| | $ | 39 |
|
| June 30, 2015 | | $ | 3,593 |
| | $ | 41 |
|
| June 30, 2014 | | $ | 3,153 |
| | $ | 34 |
|
____________
| |
(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, 2015.
|
| |
(3) | The Company guarantees that one hundred seventy-three (173) hours will be contributed upon for all employees who are compensated for all available straight time hours for each calendar month. An additional 6.5% of the basic contribution must be paid for PEER or the Program for Enhanced Early Retirement.
|
| |
(4) | Includes one plan that is not individually significant. |
The Company's contribution to multiemployer plans decreased in fiscal 2016 as compared to fiscal 2015 and 2014, as a result of reduction in employees due to the Corporate Relocation Plan. The Company expects to contribute an aggregate of $3.3 million towards multiemployer pension plans in fiscal 2017.
Multiemployer Plans Other Than Pension Plans
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The Company participates in ten multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. The plans are subject to the provisions of the Employee Retirement Income Security Act of 1974, and provide that participating employers make monthly contributions to the plans in an amount as specified in the collective bargaining agreements. Also, the plans provide that participants make self-payments to the plans, the amounts of which are negotiated through the collective bargaining process. The Company's participation in these plans is governed by collective bargaining agreements which expire on or before January 31, 2020. The Company's aggregate contributions to multiemployer plans other than pension plans in the fiscal years ended June 30, 2016, 2015 and 2014 were $6.3 million, $6.9 million and $6.6 million, respectively. The Company expects to contribute an aggregate of $6.5 million towards multiemployer plans other than pension plans in fiscal 2017.
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 a percentage of their annual pay subject to the maximum contribution allowed by the Internal Revenue Service. The Company's matching contribution is discretionary, based on approval by the Company's Board of Directors. For the calendar years 2016, 2015 and 2014, the Company's Board of Directors approved a Company matching contribution of 50% of an employee's annual contribution to the 401(k) Plan, up to 6% of the employee's eligible income. The matching contributions (and any earnings thereon) vest at the rate of 20% 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, subject to accelerated vesting under certain circumstances in connection with the Corporate Relocation Plan due to the closure of the Company’s Torrance facility or a reduction-in-force at another Company facility designated by the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement Plans. 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 $1.6 million, $1.4 million and $1.3 million in operating expenses for the fiscal years ended June 30, 2016, 2015 and 2014, respectively.
Postretirement Benefits
The Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees (“Retiree Medical Plan”). The plan provides medical, dental and vision coverage for retirees under age 65 and medical coverage only for retirees age 65 and above. Under this postretirement plan, the Company’s contributions toward premiums for retiree medical, dental and vision coverage for participants and dependents are scaled based on length of service, with greater Company contributions for retirees with greater length of service, subject to a maximum monthly Company contribution. The Company's retiree medical, dental and vision plan is unfunded, and its liability was calculated using an assumed discount rate of 3.7% at June 30, 2016. The Company projects an initial medical trend rate of 9.0% in fiscal 2017, ultimately reducing to 4.5% in 10 years.
The Company also provides a postretirement death benefit (“Death Benefit”) to certain of its employees and retirees, subject, in the case of current employees, to continued employment with the Company until retirement and certain other conditions related to the manner of employment termination and manner of death. The Company records the actuarially determined liability for the present value of the postretirement death benefit. The Company has purchased life insurance policies to fund the postretirement death benefit wherein the Company owns the policy but the postretirement death benefit is paid to the employee's or retiree's beneficiary. The Company records an asset for the fair value of the life insurance policies which equates to the cash surrender value of the policies. In fiscal 2016, the Company actuarially determined that no postretirement benefit costs related to the Corporate Relocation Plan were required to be recognized.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Retiree Medical Plan and Death Benefit
The following table shows the components of net periodic postretirement benefit cost for the Retiree Medical Plan and Death Benefit for the fiscal years ended June 30, 2016, 2015 and 2014. Net periodic postretirement benefit cost for fiscal 2016 was based on employee census information as of July 1, 2015 and asset information as of June 30, 2016.
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Components of Net Periodic Postretirement Benefit Cost (credit): | | | | | | |
| Service cost | | $ | 1,388 |
| | $ | 1,195 |
| | $ | 936 |
|
| Interest cost | | 1,194 |
| | 943 |
| | 810 |
|
| Amortization of net gains | | (196 | ) | | (500 | ) | | (880 | ) |
| Amortization of prior service credit | | (1,757 | ) | | (1,757 | ) | | (1,757 | ) |
| Net periodic postretirement benefit cost (credit) | | $ | 629 |
| | $ | (119 | ) | | $ | (891 | ) |
The difference between the assets and the Accumulated Postretirement Benefit Obligation (APBO) at the adoption of ASC 715-60 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) ($ in thousands):
|
| | | | | | | | | | | | | | | | | | |
| Date Established | | Balance at July 1, 2015 | | Annual Amortization | | | Years Remaining | | Curtailment | | Balance at June 30, 2016 |
| January 1, 2008 | | $ | (962 | ) | | $ | 230 |
| | | 3.2 | | — |
| | $ | (732 | ) |
| July 1, 2012 | | (13,001 | ) | | 1,526 |
| | | 7.5 | | — |
| | (11,475 | ) |
| | | $ | (13,963 | ) | | $ | 1,756 |
| | | | | | | $ | (12,207 | ) |
|
| | | | | | | | | | | | | | | | |
| | | Year Ended June 30, | | Year Ended June 30, |
| | | Retiree Medical Plan | | Death Benefit |
| ($ in thousands) | | 2016 | | 2015 | | 2016 | | 2015 |
| Amortization of Net (Gain) Loss: | | | | |
| Net (gain) loss as of July 1 | | $ | (8,710 | ) | | $ | (3,655 | ) | | $ | 690 |
| | $ | 690 |
|
| Net (gain) loss subject to amortization | | (8,710 | ) | | (3,655 | ) | | 690 |
| | 690 |
|
| Corridor (10% of greater of APBO or assets) | | 1,724 |
| | 1,723 |
| | (729 | ) | | (729 | ) |
| Net (gain) loss in excess of corridor | | $ | (6,986 | ) | | $ | (1,932 | ) | | $ | — |
| | $ | — |
|
| Amortization years | | 10.0 |
| | 10.8 |
| | 7.7 |
| | 8.7 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following tables provide a reconciliation of the benefit obligation and plan assets:
|
| | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2016 | | 2015 |
| Change in Benefit Obligation: | | | | |
| Projected postretirement benefit obligation at beginning of year | | $ | 24,522 |
| | $ | 20,889 |
|
| Service cost | | 1,388 |
| | 1,195 |
|
| Interest cost | | 1,194 |
| | 943 |
|
| Participant contributions | | 795 |
| | 711 |
|
| Actuarial losses | | (4,259 | ) | | 2,751 |
|
| Benefits paid | | (1,773 | ) | | (1,967 | ) |
| Projected postretirement benefit obligation at end of year | | $ | 21,867 |
| | $ | 24,522 |
|
|
| | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2016 | | 2015 |
| Change in Plan Assets: | | | | |
| Fair value of plan assets at beginning of year | | $ | — |
| | $ | — |
|
| Employer contributions | | 978 |
| | 1,256 |
|
| Participant contributions | | 795 |
| | 711 |
|
| Benefits paid | | (1,773 | ) | | (1,967 | ) |
| Fair value of plan assets at end of year | | — |
| | — |
|
| Projected postretirement benefit obligation at end of year | | $ | 21,867 |
| | $ | 24,522 |
|
| Funded status of plan | | $ | (21,867 | ) | | $ | (24,522 | ) |
|
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2016 | | 2015 |
| Amounts Recognized in the Consolidated Balance Sheets Consist of: | | | | |
| Non-current assets | | $ | — |
| | $ | — |
|
| Current liabilities | | (1,060 | ) | | (1,051 | ) |
| Non-current liabilities | | (20,807 | ) | | (23,471 | ) |
| Total | | $ | (21,867 | ) | | $ | (24,522 | ) |
|
| | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2016 | | 2015 |
| Amounts Recognized in Accumulated OCI Consist of: | | | | |
| Net gain | | $ | (7,027 | ) | | $ | (2,965 | ) |
| Transition obligation | | (12,207 | ) | | (13,963 | ) |
| Total accumulated OCI | | $ | (19,234 | ) | | $ | (16,928 | ) |
|
| | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2016 | | 2015 |
| Other Changes in Plan Assets and Benefit Obligations Recognized in OCI: | | | | |
| Unrecognized actuarial loss | | $ | (4,259 | ) | | $ | 2,751 |
|
| Amortization of net loss | | 196 |
| | 500 |
|
| Amortization of prior service cost | | 1,757 |
| | 1,757 |
|
| Total recognized in OCI | | (2,306 | ) | | 5,008 |
|
| Net periodic benefit credit | | 629 |
| | (119 | ) |
| Total recognized in net periodic benefit cost and OCI | | $ | (1,677 | ) | | $ | 4,889 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The estimated net gain and prior service credit that will be amortized from accumulated OCI into net periodic benefit cost in fiscal 2017 are $0.6 million and $1.8 million, respectively.
|
| | | |
| (In thousands) | |
| Estimated Future Benefit Payments: | |
| Year Ending: | |
| June 30, 2017 | $ | 1,080 |
|
| June 30, 2018 | $ | 1,102 |
|
| June 30, 2019 | $ | 1,143 |
|
| June 30, 2020 | $ | 1,176 |
|
| June 30, 2021 | $ | 1,210 |
|
| June 30, 2022 to June 30, 2026 | $ | 6,246 |
|
| | |
| Expected Contributions: | |
| June 30, 2017 | $ | 1,080 |
|
Sensitivity in Fiscal 2017 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 2017:
|
| | | | | | | | |
| | | 1-Percentage Point |
| (In thousands) | | Increase | | Decrease |
| Effect on total of service and interest cost components | | $ | 181 |
| | $ | (154 | ) |
| Effect on accumulated postretirement benefit obligation | | $ | 1,664 |
| | $ | (1,423 | ) |
Note 15. Bank Loan
The Company maintains a $75.0 million senior secured revolving credit facility (“Revolving Facility”) with JPMorgan Chase Bank, N.A. and SunTrust Bank (collectively, the “Lenders”), with a sublimit on letters of credit and swingline loans of $30.0 million and $15.0 million. respectively. The Revolving Facility includes an accordion feature whereby the Company may increase the Revolving Commitment by up to an additional $50.0 million, subject to certain conditions. Advances are based on the Company’s eligible accounts receivable, eligible inventory, and the value of certain real property and trademarks, less required reserves. The commitment fee ranges from 0.25% to 0.375% per annum based on average revolver usage. Outstanding obligations are collateralized by all of the Company’s assets, excluding certain real property not included in the borrowing base, machinery and equipment (other than inventory), and the Company's preferred stock portfolio. Borrowings under the Revolving Facility bear interest based on average historical excess availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%. The Company is subject to a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including financial covenants relating to the maintenance of a fixed charge coverage ratio in certain circumstances, and the right of the Lenders to establish reserve requirements, which may reduce the amount of credit otherwise available to the Company. The Company is allowed to pay dividends, provided, among other things, certain excess availability requirements are met, and no event of default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The Revolving Facility expires on March 2, 2020.
At June 30, 2016, the Company was eligible to borrow up to a total of $58.6 million under the Revolving Facility and had outstanding borrowings of $0.1 million, utilized $11.9 million of the letters of credit sublimit, and had excess availability under the Revolving Facility of $46.6 million. At June 30, 2016, the weighted average interest rate on the Company's outstanding borrowings under the Revolving Facility was 1.64% and the Company was in compliance with all of the restrictive covenants under the Revolving Facility.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 16. 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 are repaid from the Company’s discretionary plan contributions over the original 15 year term with a variable rate of interest. The annual interest rate was 1.99% at June 30, 2016, which is updated on a quarterly basis.
|
| | | | | | |
| | | As of and for the years ended June 30, |
| | | 2016 | | 2015 | | 2014 |
| Loan amount (in thousands) | | $6,434 | | $11,234 | | $16,035 |
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.
Historically, the Company used the dividends, if any, 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 2016, 2015 or 2014.
During the fiscal years ended June 30, 2016, 2015 and 2014, the Company charged $3.4 million, $4.4 million and $3.3 million, respectively, to compensation expense related to the ESOP. The decrease in ESOP expense in fiscal 2016 is primarily due to the reduction in the number of shares being allocated to participant accounts as a result of paying down the loan amount. The increase in ESOP expense in fiscal 2015 as compared to fiscal 2014 was due to the increase in the fair market value of the Company's shares which determines the ESOP expense recorded. The difference between cost and fair market value of committed to be released shares, which was $36,000, $1.0 million and $0.3 million for the fiscal years ended June 30, 2016, 2015 and 2014, respectively, is recorded as additional paid-in capital. |
| | | | | | | | |
| | | June 30, |
| | | 2016 | | 2015 |
| Allocated shares | | 1,941,934 |
| | 1,970,117 |
|
| Committed to be released shares | | 169,603 |
| | 172,398 |
|
| Unallocated shares | | 220,925 |
| | 390,528 |
|
| Total ESOP shares | | 2,332,462 |
| | 2,533,043 |
|
| | | | | |
| (In thousands) | | | | |
| Fair value of ESOP shares | | $ | 74,779 |
| | $ | 59,527 |
|
Note 17. Share-based Compensation
Non-qualified stock options with time-based vesting (“NQOs”)
In fiscal 2016, the Company granted 21,595 shares issuable upon the exercise of NQOs with a weighted average exercise price of $29.48 per share to eligible employees under the Amended Equity Plan which vest ratably over a three-year period.
Following are the weighted average assumptions used in the Black-Scholes valuation model for NQOs granted during the fiscal years ended June 30, 2016, 2015 and 2014 |
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| | | 2016 | | 2015 | | 2014 |
| Weighted average fair value of NQOs | | $ | 12.63 |
| | $ | 10.38 |
| | $ | 9.17 |
|
| Risk-free interest rate | | 1.6 | % | | 1.5 | % | | 1.7 | % |
| Dividend yield | | — | % | | — | % | | — | % |
| Average expected term | | 5.1 years |
| | 5.1 years |
| | 6 years |
|
| Expected stock price volatility | | 47.1 | % | | 47.9 | % | | 50.4 | % |
The Company’s assumption regarding expected stock price volatility is based on the historical volatility of the Company’s stock price. The risk-free interest rate is based on U.S. Treasury zero-coupon issues at the date of grant with a remaining term
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
equal to the expected life of the stock options. The average expected term is based on historical weighted time outstanding and the expected weighted time outstanding calculated by assuming the settlement of outstanding awards at the midpoint between the vesting date and the end of the contractual term of the award. Currently, management estimates an annual forfeiture rate of 4.8% based on actual forfeiture experience. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. |
| |
| Item 14. | Principal Accountant Fees and Services |
The following table summarizes NQO activity for the three most recent fiscal years: |
| | | | | | | | | | | | |
| Outstanding NQOs: | | Number of NQOs | | Weighted Average Exercise Price ($) | | Weighted Average Grant Date Fair Value ($) | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value ($ in thousands) |
| Outstanding at June 30, 2013 | | 557,427 |
| | 12.81 | | 5.44 | | 5.1 | | 1,620 |
|
| Granted | | 1,927 |
| | 18.68 | | 9.17 | | 6.4 | | — |
|
| Exercised | | (112,964 | ) | | 13.10 | | 5.81 | | — | | 895 |
|
| Cancelled/Forfeited | | (33,936 | ) | | 16.63 | | 6.13 | | — | | — |
|
| Outstanding at June 30, 2014 | | 412,454 |
| | 12.44 | | 5.30 | | 4.4 | | 3,782 |
|
| Granted | | 25,703 |
| | 23.91 | | 10.38 | | 6.8 | | — |
| Exercised | | (95,723 | ) | | 16.17 | | 5.86 | | — | | 747 |
|
| Cancelled/Forfeited | | (13,134 | ) | | 11.26 | | 5.00 | | — | | — |
| Outstanding at June 30, 2015 | | 329,300 |
| | 12.30 | | 5.54 | | 3.9 | | 3,700 |
|
| Granted | | 21,595 |
| | 29.48 | | 12.63 | | 6.4 | | — |
|
| Exercised | | (112,895 | ) | | 12.35 | | 5.37 | | — | | 1,853 |
|
| Cancelled/Forfeited | | (18,371 | ) | | 13.45 | | 6.17 | | — | | — |
|
| Outstanding at June 30, 2016 | | 219,629 |
| | 13.87 | | 6.28 | | 3.7 | | 3,995 |
|
| Vested and exercisable, June 30, 2016 | | 180,298 |
| | 11.06 | | 5.13 | | 3.1 | | 3,800 |
|
| Vested and expected to vest, June 30, 2016 | | 217,160 |
| | 13.72 | | 6.22 | | 3.6 | | 3,983 |
|
The aggregate intrinsic values outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic value, based on the Company’s closing stock price of $32.06 at June 30, 2016, $23.50 at June 30, 2015 and $21.61 at June 30, 2014, representing the last trading day of the respective fiscal years, which would have been receivedinformation required by NQO holders had all award holders exercised their NQOs that were in-the-money as of those dates. The aggregate intrinsic value of stock option exercises in each fiscal period above represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. NQOs outstanding that are expected to vest are net of estimated forfeitures.
Total fair value of NQOs vested during fiscal 2016, 2015 and 2014 was $0.3 million, $0.5 million and $0.7 million, respectively. The Company received $1.4 million in proceeds from exercises of vested NQOs in fiscal 2016, and $1.5 million in proceeds from exercises of vested NQOs in each of fiscal 2015 and 2014.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table summarizes nonvested NQO activity for the three most recent fiscal years: |
| | | | | | | | | |
| Nonvested NQOs: | | Number of NQOs | | Weighted Average Exercise Price ($) | | Weighted Average Grant Date Fair Value ($) | | Weighted Average Remaining Life (Years) |
| Outstanding at June 30, 2013 | | 315,661 |
| | 10.80 | | 5.12 | | 6.1 |
| Granted | | 1,927 |
| | 18.68 | | 9.17 | | 6.4 |
| Vested | | (133,957 | ) | | 11.02 | | 5.21 | | — |
| Forfeited | | (15,833 | ) | | 11.48 | | 5.49 | | — |
| Outstanding at June 30, 2014 | | 167,798 |
| | 10.65 | | 5.06 | | 5.3 |
| Granted | | 25,703 |
| | 23.91 | | 10.38 | | 6.8 |
| Vested | | (101,172 | ) | | 9.87 | | 4.72 | | — |
| Forfeited | | (12,134 | ) | | 10.31 | | 4.91 | | — |
| Outstanding at June 30, 2015 | | 80,195 |
| | 15.94 | | 7.21 | | 5.2 |
| Granted | | 21,595 |
| | 29.48 | | 12.63 | | 6.4 |
| Vested | | (47,418 | ) | | 14.05 | | 6.44 | | — |
| Forfeited | | (15,641 | ) | | 12.95 | | 6.09 | | — |
| Outstanding at June 30, 2016 | | 38,731 |
| | 27.02 | | 11.63 | | 6.1 |
As of June 30, 2016 and 2015, there was $0.4 million of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at June 30, 2016 is expected to be recognized over the weighted average period of 2.2 years. Total compensation expense for NQOs was $0.2 million, $0.4 million and $0.6 million in fiscal 2016, 2015 and 2014, respectively.
Non-qualified stock options with performance-based and time-based vesting (“PNQs”)
In the fiscal year ended June 30, 2016, the Company granted a total of 143,466 shares with an exercise price of $29.48 per share to eligible employees under the Amended Equity Plan. With the exception of a portion of the award to the Company’s President and Chief Executive Officer as described below, these PNQs vest over a three-year period with one-third of the total number of shares subject to each such PNQ becoming exercisable each year on the anniversary of the grant date, based on the Company’s achievement of modified net income targets for fiscal 2016 ("Fiscal 2016 Target") as approved by the Compensation Committee, subject to the participant’s employment by the Company or service on the Board of Directors of the Company on the applicable vesting date and the acceleration provisions contained in the Amended Equity Plan and the applicable award agreement. But if actual modified net income for fiscal 2016 is less than the Fiscal 2016 Target, then 20% of the total shares issuable under such grantthis item will be forfeited.
On June 3, 2016, the Compensation Committee of the Board of Directors of the Company determined that a portion of the non-qualified stock option granted to Michael H. Keown, the Company's President and Chief Executive Officer, on December 3, 2015 (the “Original Option”) was invalid because such portion caused the total number of option shares granted to Mr. Keown in calendar year 2015 to exceed the limit of 75,000 shares that may be granted to a participant in a single calendar year under the Amended Equity Plan by 22,862 shares. Therefore, the Compensation Committee reduced the total number of shares of common stock issuable under the Original Option by 22,862 shares. The reduction of the 22,862 excess option shares brought the total number of option shares granted to Mr. Keown in calendar 2015 within the limitation of the Amended Equity Plan.
In addition, on June 3, 2016, the Compensation Committee, in accordance with the provisions of the Amended Equity Plan, granted Mr. Keown a non-qualified stock option to purchase 22,862 shares of the Company's common stock (the “New Option”) with an exercise price of $29.48 per share, which was the greater of the exercise price of the Original Option and the closing price of the Company's common stock as reported on the NASDAQ Global Market on June 3, 2016, the date of grant. The New Option is subject to the same terms and conditions of the Original Option including an expiration date of December 3, 2022, and the three-year vesting schedule, except that to comply with the Amended Equity Plan's minimum vesting schedule of one year from the grant date, one-third of shares issuable under the New Option will vest on June 3, 2017, and the remainder of the New Option shares will vest one-third each on the second and third anniversaries of the grant date of the Original Option,
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
based on the Company’s achievement of the same performance goals as the Original Option, subject to Mr. Keown’s continued employment on the applicable vesting date.
In the fiscal year ended June 30, 2015, the Company granted 121,024 shares issuable upon the exercise of PNQs with an exercise price of $23.44 per share to eligible employees under the Amended Equity Plan. These PNQs vest over a three-year period with one-third of the total number of shares subject to each such PNQ becoming exercisable each year on the anniversary of the grant date, based on the Company’s achievement of modified net income targets for fiscal years within the performance period as approved by the Compensation Committee, subject to catch-up vesting of previously unvested shares in a subsequent year within the three year period in which a cumulative modified net income target as approved by the Compensation Committee is achieved, in each case, subject to the participant’s employment by the Company or service on the Board of Directors of the Company on the applicable vesting date and the acceleration provisions contained in the Amended Equity Plan and the applicable award agreement.
In the fiscal year ended June 30, 2014, the Company granted a total of 112,442 shares issuable upon the exercise of PNQs with a weighted average exercise price of $21.27 per share to eligible employees under the Amended Equity Plan. These PNQs vest over a three-year period with one-third of the total number of shares subject to each such PNQ vesting on the first anniversary of the grant date based on the Company’s achievement of a modified net income target for the first fiscal year of the performance period as approved by the Compensation Committee, and the remaining two-thirds of the total number of shares subject to each PNQ vesting on the third anniversary of the grant date based on the Company’s achievement of a cumulative modified net income target for all three years during the performance period as approved by the Compensation Committee, in each case, subject to the participant’s employment by the Company or service on the Board of Directors of the Company on the applicable vesting date. No PNQs were granted prior to fiscal 2014.
Following are the assumptions used in the Black-Scholes valuation model for PNQs granted during the fiscal years ended June 30, 2016, 2015 and 2014:
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| | | 2016 | | 2015 | | 2014 |
| Weighted average fair value of PNQs | | $ | 11.38 |
| | $ | 10.16 |
| | $ | 10.49 |
|
| Risk-free interest rate | | 1.6 | % | | 1.5 | % | | 1.8 | % |
| Dividend yield | | — |
| | — | % | | — | % |
| Average expected term (years) | | 4.9 |
| | 5.0 |
| | 6.0 |
|
| Expected stock price volatility | | 42.5 | % | | 47.9 | % | | 50.5 | % |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table summarizes PNQ activity for the three most recent fiscal years:
|
| | | | | | | | | | | | |
| Outstanding PNQs: | | Number of PNQs | | Weighted Average Exercise Price ($) | | Weighted Average Grant Date Fair Value ($) | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value ($ in thousands) |
| Outstanding at June 30, 2013 | | — |
| | — | | — | | — | | — |
|
| Granted | | 112,442 |
| | 21.27 | | 10.49 | | 6.5 | | — |
|
| Cancelled/Forfeited | | — |
| | — | | — | | — | | — |
|
| Outstanding at June 30, 2014 | | 112,442 |
| | 21.27 | | 10.49 | | 6.5 | | 38 |
|
| Granted | | 121,024 |
| | 23.44 | | 10.16 | | 6.6 | | — |
|
| Cancelled/Forfeited | | (9,399 | ) | | 21.33 | | 10.52 | | — | | — |
|
| Outstanding at June 30, 2015 | | 224,067 |
| | 22.44 | | 10.31 | | 6.0 | | 237 |
|
| Granted | | 143,466 |
| | 29.48 | | 11.38 | | 6.2 | | — |
|
| Exercised | | (14,144 | ) | | 21.20 | | 10.45 | | 0 | | 107 |
|
| Cancelled/Forfeited | | (64,790 | ) | | 23.20 | | 10.37 | | 0 | | — |
|
| Outstanding at June 30, 2016 | | 288,599 |
| | 25.83 | | 10.82 | | 5.7 | | 1,798 |
|
| Vested and exercisable, June 30, 2016 | | 48,132 |
| | 22.52 | | 10.31 | | 5.1 | | 459 |
|
| Vested and expected to vest, June 30, 2016 | | 274,919 |
| | 25.75 | | 10.81 | | 5.7 | | 1,736 |
|
The aggregate intrinsic values outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of $32.06 at June 30, 2016, $23.50 at June 30, 2015 and $21.61 at June 30, 2014 representing the last trading day of the respective fiscal years, which would have been received by PNQ holders had all award holders exercised their PNQs that were in-the-money as of those dates. The aggregate intrinsic value of stock option exercises in fiscal 2016 represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. PNQs outstanding that are expected to vest are net of estimated forfeitures.
Total fair value of PNQs vested during the fiscal years ended June 30, 2016 and 2015 was $0.3 million and $0.4 million, respectively. No PNQs vested during the fiscal year ended June 30, 2014. The Company received $0.3 million in proceeds from exercises of vested PNQs in fiscal 2016, and no PNQs were exercised during the fiscal years ended June 30, 2015 or 2014.
As of June 30, 2016, the Company met the performance target for the first year of the fiscal 2014 and 2015 awards and expects that it will achieve the performance targets set forth in the PNQ agreements for the remainder of the fiscal 2014, fiscal 2015Proxy Statement and fiscal 2016 awards.is incorporated in this report by reference.
The following table summarizes nonvested NQO activity for the two most recent fiscal years: |
| | | | | | | | | | | | |
| Nonvested PNQs: | | Number of PNQs | | Weighted Average Exercise Price ($) | | Weighted Average Grant Date Fair Value ($) | | Weighted Average Remaining Life (Years) |
| Outstanding at June 30, 2014 | | 112,442 |
| | 21.27 |
| | 10.49 |
| | 6.5 |
|
| Granted | | 121,024 |
| | 23.44 |
| | 10.16 |
| | 6.6 |
|
| Vested | | (34,959 | ) | | 21.27 |
| | 10.49 |
| | — |
|
| Forfeited | | (9,399 | ) | | 21.33 |
| | 10.52 |
| | — |
|
| Outstanding at June 30, 2015 | | 189,108 |
| | 22.66 |
| | 10.28 |
| | 6.2 |
|
| Granted | | 143,466 |
| | 29.48 |
| | 11.38 |
| | 6.2 |
|
| Vested | | (27,317 | ) | | 10.16 |
| | 23.44 |
| | — |
|
| Forfeited | | (64,790 | ) | | 23.20 |
| | 10.37 |
| | — |
|
| Outstanding at June 30, 2016 | | 240,467 |
| | 26.49 |
| | 10.92 |
| | 5.9 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
As of June 30, 2016 and 2015, there was $1.9 million and $1.5 million , respectively, of unrecognized compensation cost related to PNQs. The unrecognized compensation cost related to PNQs at June 30, 2016 is expected to be recognized over the weighted average period of 1.5 years. Total compensation expense related to PNQs in fiscal 2016, 2015 and 2014 was $0.5 million, $0.5 million and $0.3 million, respectively.
Restricted Stock
During fiscal 2016, 2015 and 2014 the Company granted a total of 10,170 shares, 13,256 shares and 9,200 shares of restricted stock under the Amended Equity Plan, respectively, with a weighted average grant date fair value of $29.99, $23.64, and $20.48 per share, respectively, to eligible employees and directors. Shares of restricted stock generally vest at the end of three years for eligible employees. Shares of restricted stock generally vest ratably over a period of three years for directors. During the fiscal year ended June 30, 2016, 24,841 shares of restricted stock vested, of which 5,177 shares were withheld to meet the employees’ minimum statutory tax withholding and retired.
The following table summarizes restricted stock activity for the three most recent fiscal years: |
| | | | | | | | | | | |
| Outstanding and Nonvested Restricted Stock Awards: | | Shares Awarded | | Weighted Average Grant Date Fair Value ($) | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value ($ in thousands) |
| Outstanding at June 30, 2013 | | 139,360 |
| | 9.87 |
| | 1.9 | | 1,959 |
|
| Granted | | 9,200 |
| | 20.48 |
| | — | | 188 |
|
| Exercised/Released | | (38,212 | ) | | 11.59 |
| | — | | 820 |
|
| Cancelled/Forfeited | | (14,136 | ) | | 9.38 |
| | — | | — |
|
| Outstanding at June 30, 2014 | | 96,212 |
| | 10.27 |
| | 1.5 | | 2,079 |
|
| Granted | | 13,256 |
| | 23.64 |
| | — | | 313 |
|
| Exercised/Released(1) | | (53,402 | ) | | 8.43 |
| | — | | 1,377 |
|
| Cancelled/Forfeited | | (8,984 | ) | | 8.36 |
| | — | | — |
|
| Outstanding at June 30, 2015 | | 47,082 |
| | 16.48 |
| | 1.2 | | 1,106 |
|
| Granted | | 10,170 |
| | 29.99 |
| | — | | 305 |
|
| Exercised/Released(2) | | (24,841 | ) | | 14.08 |
| | — | | 747 |
|
| Cancelled/Forfeited | | (8,619 | ) | | 13.06 |
| | — | | — |
|
| Outstanding at June 30, 2016 | | 23,792 |
| | 26.00 |
| | 1.8 | | 763 |
|
| Expected to vest, June 30, 2016 | | 22,253 |
| | 25.91 |
| | 1.8 | | 713 |
|
__________
(1) Includes 4,297 shares that were withheld to meet the employees' minimum statutory tax withholding and retired..
(2) Includes 5,177 shares that were withheld to meet the employees' minimum statutory tax withholding and retired.PART IV
The aggregate intrinsic value of shares outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of $32.06 at June 30, 2016, $23.50 at June 30, 2015 and $21.61 at June 30, 2014 , representing the last trading day of the respective fiscal years. Restricted stock that is expected to vest is net of estimated forfeitures.
As of June 30, 2016 and 2015, there was $0.5 million of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at June 30, 2016 is expected to be recognized over the weighted average period of 2.0 years. Total compensation expense for restricted stock was $0.2 million, $0.3 million and $0.5 million, for the fiscal years ended June 30, 2016, 2015 and 2014, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 18. Other Current Liabilities
Other current liabilities consist of the following:
|
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2016 | | 2015 |
| Accrued postretirement benefits | | $ | 1,060 |
| | $ | 1,051 |
|
| Accrued workers’ compensation liabilities | | 3,225 |
| | 2,382 |
|
| Short-term pension liabilities | | 347 |
| | 347 |
|
| Earnout payable—RLC acquisition | | 100 |
| | 100 |
|
| Other (including net taxes payable) | | 2,214 |
| | 2,272 |
|
| Other current liabilities | | $ | 6,946 |
| | $ | 6,152 |
|
|
| |
| Item 15. | Exhibits and Financial Statement Schedules |
| |
| (a) | List of Financial Statements and Financial Statement Schedules: |
1. Financial Statements included in Part II, Item 8 of this report:
|
|
|
| Consolidated Balance Sheets as of June 30, 2019 and 2018. |
|
| Consolidated Statements of Operations for the Years Ended June 30, 2019, 2018 and 2017. |
|
| Consolidated Statements of Comprehensive Income (Loss) for the Years Ended June 30, 2019, 2018 and 2017. |
|
| Consolidated Statements of Cash Flows for the Years Ended June 30, 2019, 2018 and 2017. |
|
| Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2019, 2018 and 2017. |
|
| 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 the 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 the Annual Report on Form 10-K. Each management contract or compensation plan required to be filed as an exhibit is identified by an asterisk (*).
|
| | |
| Exhibit No. | | Description |
| | |
| 2.1 | | |
| | |
| 2.2 | | Purchase Agreement, dated as of September 9, 2016, among Tea Leaf Acquisition Corp., China Mist Brands, Inc., certain stockholders of China Mist Brands, Inc., for certain limited purposes, Daniel W. Schweiker and John S. Martinson, and Daniel W. Schweiker, in his capacity as the sellers’ representative (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 14, 2016 and incorporated herein by reference).* |
| | |
| 2.3 | | |
| | |
| 3.1 | | |
| | |
| 3.2 | | |
| | |
| 3.3 | |
|
| | |
|
| | |
| Exhibit No. | | Description |
| 3.4 | | |
| 4.1 | | |
| | |
| 4.2 | | |
| | |
| 4.3 | | |
| | |
| 10.1 | | Credit Agreement, dated as of March 2, 2015, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc., the Lenders party thereto and JPMorgan Chase 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 March 6, 2015 and incorporated herein by reference). |
| | |
| 10.2 | | Pledge and Security Agreement, dated as of March 2, 2015, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on March 6, 2015 and incorporated herein by reference). |
| | |
| 10.3 | | Joinder Agreement, dated as of October 11, 2016, by and among China Mist Brands, Inc., Farmer Bros. Co., as the Borrower Representative, and JPMorgan Chase Bank, N.A., as Administrative Agent, under that certain Credit Agreement dated as of March 2, 2015 (filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2016 filed with the SEC on February 9, 2017 and incorporated herein by reference). |
| | |
| 10.4 | | Joinder to Pledge and Security Agreement, dated as of October 11, 2016, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc., China Mist Brands, Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2016 filed with the SEC on February 9, 2017 and incorporated herein by reference). |
| | |
| 10.5 | | First Amendment to Credit Agreement and First Amendment to Pledge and Security Agreement, dated as of August 25, 2017, by and among Farmer Bros. Co., China Mist Brands, Inc., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Company, Inc., the Lenders party thereto and JPMorgan Chase 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 30, 2017 and incorporated herein by reference). |
| | |
| 10.6 | | Second Amendment to Credit Agreement, dated as of September 10, 2018, by and among Farmer Bros. Co., China Mist Brands, Inc., Boyd Assets Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Company, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.6 to the Company’s Annual Report on Form 10-K filed with the SEC on September 13, 2018 and incorporated herein by reference).
|
| | |
| 10.7 | | Third Amendment to Credit Agreement and Second Amendment to Pledge and Security Agreement, dated as of October 18, 2018, by and among Farmer Bros. Co., China Mist Brands, Inc., Boyd Assets Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc., the Lenders party thereto and JPMorgan Chase 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 October 23, 2018 and incorporated herein by reference) |
| | |
|
| | |
| Exhibit No. | | Description |
| 10.8 | | Amended and Restated Credit Agreement dated as of November 6, 2018, by and among Farmer Bros. Co., China Mist Brands, Inc., Boyd Assets Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 filed with the SEC on November 9, 2018 and incorporated herein by reference). |
| | |
| 10.9 | | Amended and Restated Pledge and Security Agreement, dated as of November 6, 2018, by and among Farmer Bros. Co., China Mist Brands, Inc., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Company, Inc., the Grantors party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018 filed with the SEC on November 9, 2018 and incorporated herein by reference).
|
| | |
| 10.10 | | Joinder Agreement, dated as of November 29, 2017, by and among Boyd Assets Co., Farmer Bros. Co., as the Borrower’s Representative, and JPMorgan Chase Bank, N.A., as Administrative Agent, under that certain Credit Agreement dated as of March 2, 2015, as amended by that certain First Amendment to Credit Agreement, dated as of August 25, 2017 (filed as Exhibit 10.6 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2017 filed with the SEC on February 7, 2018 and incorporated herein by reference). |
| | |
| 10.11 | | Joinder to Pledge and Security Agreement, dated as of November 29, 2017, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc., China Mist Brands, Inc., Boyd Assets Co. and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2017 filed with the SEC on February 7, 2018 and incorporated herein by reference). |
| | |
| 10.12 | | |
| | |
| 10.13 | | |
| | |
| 10.14 | | |
| | |
| 10.15 | | |
| | |
| 10.16 | | |
| | |
| 10.17 | | |
| | |
| 10.18 | | |
| | |
|
| | |
| Exhibit No. | | Description |
| 10.19 | | |
| | |
| 10.20 | | |
| |
| 10.21 | | |
| | |
| 10.22 | | |
| | |
| 10.23 | | |
| |
| 10.24 | | |
| |
| 10.25 | | |
| |
| 10.26 | | |
| | |
| 10.27 | | |
| | |
| 10.28 | | |
| | |
| 10.29 | | |
| | |
| 10.30 | | |
| | |
|
| | |
| Exhibit No. | | Description |
| 10.31 | | |
| | |
| 10.32 | | |
| | |
| 10.33 | | |
| | |
| 10.34 | | |
| | |
| 10.35 | | |
| | |
| 10.36 | |
|
| | |
| 10.37 | | |
| | |
| 10.38 | | |
| | |
| 10.39 | | |
| | |
| 10.40 | | |
| | |
| 10.41 | | |
| | |
| 10.42 | | |
| | |
| 10.43 | | |
| | |
|
| | |
| Exhibit No. | | Description |
| 10.44 | |
|
| | |
| 10.45 | | |
| | |
| 10.46 | |
|
| | |
| 10.47 | |
|
| | |
| 10.48 | | |
| | |
| 10.49 | | |
| |
| 10.50 | | |
| | |
| 10.51 | | |
| | |
| 10.52 | | |
| | |
| 10.53 | | |
| | |
| 10.54 | | |
| | |
| 10.55 | | |
| | |
|
| | |
| Exhibit No. | | Description |
| 10.56 | | |
| | |
| 10.57 | | |
| | |
| 14.1 | | |
| | |
| 21.1 | | |
| | |
| 23.1 | | |
| | |
| 31.1 | | |
| |
| 31.2 | | |
| | |
| 32.1 | | |
| |
| 32.2 | | |
| | |
| 101 | | The following financial statements from the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2019, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive (Loss) Income, (iv) Consolidated Statements of Cash Flows, (v) Consolidated Statements of Stockholders' Equity, and (vi) Notes to Consolidated Financial Statements (furnished herewith). |
| | |
________________
|
| |
| * | Pursuant to Item 601(b)(2) of Regulation S-K, the schedules and/or exhibits to this agreement have been omitted. The Registrant undertakes to supplementally furnish copies of the omitted schedules and/or exhibits to the Securities and Exchange Commission upon request. |
| ** | Management contract or compensatory plan or arrangement. |
Note 19. Other Long-Term Liabilities |
| |
| Item 16. | Form 10-K Summary |
Other long-term liabilities include
None.
SIGNATURES
Pursuant to the following: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.
|
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2016 | | 2015 |
| New Facility lease obligation(1) | | $ | 28,110 |
| | $ | — |
|
| Earnout payable—RLC acquisition(2) | | 100 |
| | 200 |
|
| Derivative liabilities, non-current | | — |
| | 25 |
|
| Other long-term liabilities | | $ | 28,210 |
| | $ | 225 |
|
|
| | | | | |
| | | | | |
| FARMER BROS. CO. |
| | |
| By: | | /s/ Christopher P. Mottern |
| | | Christopher P. Mottern
Interim President and Chief Executive Officer
(chief executive officer) |
| | | September 10, 2019 |
| | | |
| By: | | /s/ David G. Robson |
| | | David G. Robson
Treasurer and Chief Financial Officer
(principal financial and accounting officer) |
| | | September 10, 2019 |
___________
(1) Lease obligation associated with constructionPursuant to the requirements of the New Facility (see 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.
|
| | | | |
| | | | |
| | | | |
| /s/ Randy E. Clark | | Chairman of the Board and Director | | September 10, 2019 |
| Randy E. Clark | | | | |
| | | | |
| /s/ Allison M. Boersma | | Director | | September 10, 2019 |
| Allison M. Boersma | | | | |
| | | | |
| /s/ Hamideh Assadi | | | | |
| Hamideh Assadi | | Director | | September 10, 2019 |
| | | | |
| /s/ Stacy Loretz-Congdon | | Director | | September 10, 2019 |
| Stacy Loretz-Congdon | | | | |
| | | | |
| /s/ Charles F. Marcy | | Director | | September 10, 2019 |
| Charles F. Marcy | | | | |
| | | | |
| /s/ Christopher P. Mottern | | Director | | September 10, 2019 |
| Christopher P. Mottern | | | | |
| | | | |
| /s/ David W. Ritterbush | | Director | | September 10, 2019 |
| David W. Ritterbush | | | | |
Note 4
).REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of Farmer Bros. Co.
(2) Earnout payableOpinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Farmer Bros. Co. and subsidiaries (the "Company") as of June 30, 2019 and 2018, 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, 2019, and the related notes (collectively referred to RLC (seeas the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of June 30, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of June 30, 2019, based on criteria established in Note 2).Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 10, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Note 20. Income Taxes
The current and deferred componentsThese financial statements are the responsibility of the provision for income taxes consist ofCompany's management. Our responsibility is to express an opinion on the following:
|
| | | | | | | | | | | | |
| | | June 30, |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Current: | | | | | | |
| Federal | | $ | 214 |
| | $ | (30 | ) | | $ | 293 |
|
| State | | 103 |
| | 309 |
| | 275 |
|
| Total current income tax expense | | 317 |
| | 279 |
| | 568 |
|
| Deferred: | | | | | | |
| Federal | | (66,648 | ) | | 106 |
| | 99 |
|
| State | | (13,666 | ) | | 17 |
| | 38 |
|
| Total deferred income tax (benefit) expense | | (80,314 | ) | | 123 |
| | 137 |
|
| Income tax (benefit) expense | | $ | (79,997 | ) | | $ | 402 |
| | $ | 705 |
|
Income tax expense or benefit from continuing operations is generally determined without regardCompany's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to other categories of earnings, such as discontinued operations and OCI. An exception is provided in ASC 740, “Tax Provisions,” 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 income tax benefit allocated to continuing operations is the amount by which the loss from continuing operations reduces the income tax expense recordedbe independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
Dallas, Texas
September 10, 2019
We have served as the Company’s auditor since fiscal 2014.
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data) |
| | | | | | | |
| | As of June 30, |
| | 2019 | | 2018 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 6,983 |
| | $ | 2,438 |
|
| Accounts receivable, net of allowance for doubtful accounts of $1,324 and $495, respectively | 55,155 |
| | 58,498 |
|
| Inventories | 87,910 |
| | 104,431 |
|
| Income tax receivable | 1,191 |
| | 305 |
|
| Short-term derivative assets | 1,865 |
| | — |
|
| Prepaid expenses | 6,804 |
| | 7,842 |
|
| Total current assets | 159,908 |
| | 173,514 |
|
| Property, plant and equipment, net | 189,458 |
| | 186,589 |
|
| Goodwill | 36,224 |
| | 36,224 |
|
| Intangible assets, net | 28,878 |
| | 31,515 |
|
| Other assets | 9,468 |
| | 8,381 |
|
| Long-term derivative assets | 674 |
| | — |
|
| Deferred income taxes | — |
| | 39,308 |
|
| Total assets | $ | 424,610 |
| | $ | 475,531 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable | 72,771 |
| | 56,603 |
|
| Accrued payroll expenses | 14,518 |
| | 17,918 |
|
| Short-term borrowings under revolving credit facility | — |
| | 89,787 |
|
| Short-term obligations under capital leases | 34 |
| | 190 |
|
| Short-term derivative liabilities | 1,474 |
| | 3,300 |
|
| Other current liabilities | 7,309 |
| | 10,659 |
|
| Total current liabilities | 96,106 |
| | 178,457 |
|
| Long-term borrowings under revolving credit facility | 92,000 |
| | — |
|
| Accrued pension liabilities | 47,216 |
| | 40,380 |
|
| Accrued postretirement benefits | 23,024 |
| | 20,473 |
|
| Accrued workers’ compensation liabilities | 4,747 |
| | 5,354 |
|
| Other long-term liabilities | 4,023 |
| | 1,812 |
|
| Total liabilities | $ | 267,116 |
| | $ | 246,476 |
|
| Commitments and contingencies |
| |
|
| Stockholders’ equity: | | | |
| Preferred stock, $1.00 par value, 500,000 shares authorized; Series A Convertible Participating Cumulative Perpetual Preferred Stock, 21,000 shares authorized; 14,700 shares issued and outstanding as of June 30, 2019 and 2018, respectively; liquidation preference of $15,624 and $15,089 as of June 30, 2019 and 2018, respectively | 15 |
| | 15 |
|
| Common stock, $1.00 par value, 25,000,000 shares authorized; 17,042,132 and 16,951,659 shares issued and outstanding at June 30, 2019 and 2018, respectively | 17,042 |
| | 16,952 |
|
| Additional paid-in capital | 57,912 |
| | 55,965 |
|
| Retained earnings | 146,177 |
| | 220,307 |
|
| Unearned ESOP shares | — |
| | (2,145 | ) |
| Accumulated other comprehensive loss | (63,652 | ) | | (62,039 | ) |
| Total stockholders’ equity | $ | 157,494 |
| | $ | 229,055 |
|
| Total liabilities and stockholders’ equity | $ | 424,610 |
| | $ | 475,531 |
|
The accompanying notes are an integral part of these consolidated financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
|
| | | | | | | | | | | |
| | For the Years Ended June 30, |
| | 2019 | | 2018 | | 2017 |
| Net sales | $ | 595,942 |
| | $ | 606,544 |
| | $ | 541,500 |
|
| Cost of goods sold | 416,840 |
| | 399,155 |
| | 354,649 |
|
| Gross profit | 179,102 |
| | 207,389 |
| | 186,851 |
|
| Selling expenses | 139,647 |
| | 153,391 |
| | 133,534 |
|
| General and administrative expenses | 48,959 |
| | 49,429 |
| | 42,945 |
|
| Restructuring and other transition expenses | 4,733 |
| | 662 |
| | 11,016 |
|
| Net gain from sale of Torrance Facility | — |
| | — |
| | (37,449 | ) |
| Net gains from sale of Spice Assets | (593 | ) | | (770 | ) | | (919 | ) |
| Net losses (gains) from sales of other assets | 1,058 |
| | (196 | ) | | (1,210 | ) |
| Impairment losses on intangible assets | — |
| | 3,820 |
| | — |
|
| Operating expenses | 193,804 |
| | 206,336 |
| | 147,917 |
|
| (Loss) income from operations | (14,702 | ) | | 1,053 |
| | 38,934 |
|
| Other (expense) income: | | | | | |
| Dividend income | — |
| | 12 |
| | 1,007 |
|
| Interest income | — |
| | 2 |
| | 567 |
|
| Interest expense | (12,000 | ) | | (9,757 | ) | | (8,601 | ) |
| Pension settlement charge | (10,948 | ) | | — |
| | — |
|
| Other, net | 4,166 |
| | 7,722 |
| | 5,459 |
|
| Total other (expense) income | (18,782 | ) | | (2,021 | ) | | (1,568 | ) |
| (Loss) income before taxes | (33,484 | ) | | (968 | ) | | 37,366 |
|
| Income tax expense | 40,111 |
| | 17,312 |
| | 14,815 |
|
| Net (loss) income | $ | (73,595 | ) | | $ | (18,280 | ) | | $ | 22,551 |
|
| Less: Cumulative preferred dividends, undeclared and unpaid | 535 |
| | 389 |
| | — |
|
| Net (loss) income available to common stockholders | $ | (74,130 | ) | | $ | (18,669 | ) | | $ | 22,551 |
|
| Net (loss) income available to common stockholders per common share—basic | $ | (4.36 | ) | | $ | (1.11 | ) | | $ | 1.35 |
|
| Net (loss) income available to common stockholders per common share—diluted | $ | (4.36 | ) | | $ | (1.11 | ) | | $ | 1.34 |
|
| Weighted average common shares outstanding—basic | 16,996,354 |
| | 16,815,020 |
| | 16,668,745 |
|
| Weighted average common shares outstanding—diluted | 16,996,354 |
| | 16,815,020 |
| | 16,785,752 |
|
The accompanying notes are an integral part of these consolidated financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(In thousands)
|
| | | | | | | | | | | |
| | For the Years Ended June 30, |
| | 2019 | | 2018 | | 2017 |
| Net (loss) income | $ | (73,595 | ) | | $ | (18,280 | ) | | $ | 22,551 |
|
| Other comprehensive income (loss), net of tax: | | | | | |
| Unrealized losses on derivative instruments designated as cash flow hedges, net of tax | (9,198 | ) | | (5,922 | ) | | (2,900 | ) |
| Losses on derivative instruments designated as cash flow hedges reclassified to cost of goods sold, net of tax | 9,196 |
| | 800 |
| | 510 |
|
| Change in the funded status of retiree benefit obligations, net of tax | (9,777 | ) | | 4,576 |
| | 7,466 |
|
| Pension settlement charge, net of tax | 8,165 |
| | — |
| | — |
|
| Total comprehensive (loss) income, net of tax | $ | (75,209 | ) | | $ | (18,826 | ) | | $ | 27,627 |
|
The accompanying notes are an integral part of these consolidated financial statements.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
FARMER BROS. CO. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (In thousands, except share and per share data) |
| | | | | | | | | | | | | | | | | | |
| | Preferred Shares | | Preferred Stock Amount | | Common Shares | | Common Stock Amount | | Additional Paid-in Capital | | Retained Earnings | | Unearned ESOP Shares | | Accumulated Other Comprehensive Income (Loss) | | Total |
| Balance at June 30, 2016 | — |
| | $ | — |
| | 16,781,561 |
| | $ | 16,782 |
| | $ | 39,096 |
| | $ | 214,442 |
| | $ | (6,434 | ) | | $ | (66,569 | ) | | $ | 197,317 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | — |
| | 22,551 |
| | — |
| | — |
| | 22,551 |
|
| Unrealized losses on derivative instruments designated as cash flow hedges, net of reclassifications to cost of goods sold, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,390 | ) | | (2,390 | ) |
| Change in the funded status of retiree benefit obligations, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 7,466 |
| | 7,466 |
|
| ESOP compensation expense, including reclassifications | — |
| | — |
| | — |
| | — |
| | 342 |
| | — |
| | 2,145 |
| | — |
| | 2,487 |
|
| Share-based compensation | — |
| | — |
| | (889 | ) | | (1 | ) | | 1,473 |
| | — |
| | — |
| | — |
| | 1,472 |
|
| Stock option exercises | — |
| | — |
| | 82,803 |
| | 83 |
| | 604 |
| | — |
| | — |
| | — |
| | 687 |
|
| Shares withheld to cover taxes | — |
| | — |
| | (17,473 | ) | | (18 | ) | | (20 | ) | | — |
| | — |
| | — |
| | (38 | ) |
| Balance at June 30, 2017 | — |
| | — |
| | 16,846,002 |
| | 16,846 |
| | 41,495 |
| | 236,993 |
| | (4,289 | ) | | (61,493 | ) | | 229,552 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (18,280 | ) | | — |
| | — |
| | (18,280 | ) |
| Adjustment due to the adoption of ASU 2017-12 | — |
| | — |
| | — |
| | — |
| | — |
| | 342 |
| | — |
| | (209 | ) | | 133 |
|
| Adjustment due to the adoption of ASU 2016-09 | — |
| | — |
| | — |
| | — |
| | — |
| | 1,641 |
| | — |
| | — |
| | 1,641 |
|
| Unrealized losses on derivative instruments designated as cash flow hedges, net of reclassifications to cost of goods sold, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,913 | ) | | (4,913 | ) |
| Change in the funded status of retiree benefit obligations, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 4,576 |
| | 4,576 |
|
| ESOP compensation expense, including reclassifications | — |
| | — |
| | — |
| | — |
| | 150 |
| | — |
| | 2,144 |
| | — |
| | 2,294 |
|
| Share-based compensation | — |
| | — |
| | 9,155 |
| | 9 |
| | 1,518 |
| | — |
| | — |
| | — |
| | 1,527 |
|
| Stock option exercises | — |
| | — |
| | 96,502 |
| | 97 |
| | 1,245 |
| | — |
| | — |
| | — |
| | 1,342 |
|
| Consideration for Boyd Coffee acquisition | 14,700 |
| | 15 |
| | — |
| | — |
| | 11,557 |
| | — |
| | — |
| | — |
| | 11,572 |
|
| Cumulative preferred dividends, undeclared and unpaid | — |
| | — |
| | — |
| | — |
| | — |
| | (389 | ) | | — |
| | — |
| | (389 | ) |
| Balance at June 30, 2018 | 14,700 |
| | 15 |
| | 16,951,659 |
| | 16,952 |
| | 55,965 |
| | 220,307 |
| | (2,145 | ) | | (62,039 | ) | | 229,055 |
|
| Net loss | — |
| | — |
| | — |
| | — |
| | — |
| | (73,595 | ) | | — |
| | — |
| | (73,595 | ) |
| Net reclassification of unrealized losses on cash flow hedges, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | | (1 | ) |
| Pension settlement charge, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8,165 |
| | 8,165 |
|
| Change in the funded status of retiree benefit obligations, net of tax | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (9,777 | ) | | (9,777 | ) |
| ESOP compensation expense, including reclassifications | — |
| | — |
| | 37,571 |
| | 37 |
| | 364 |
| | — |
| | 2,145 |
| | — |
| | 2,546 |
|
| Share-based compensation | — |
| | — |
| | 18,298 |
| | 18 |
| | 1,111 |
| | — |
| | — |
| | — |
| | 1,129 |
|
| Stock option exercises | — |
| | — |
| | 34,604 |
| | 35 |
| | 472 |
| | — |
| | — |
| | — |
| | 507 |
|
| Cumulative preferred dividends, undeclared and unpaid | — |
| | — |
| | — |
| | — |
| | — |
| | (535 | ) | | — |
| | — |
| | (535 | ) |
| Balance at June 30, 2019 | 14,700 |
| | $ | 15 |
| | 17,042,132 |
| | $ | 17,042 |
| | $ | 57,912 |
| | $ | 146,177 |
| | $ | — |
| | $ | (63,652 | ) | | $ | 157,494 |
|
The accompanying notes are an integral part of these consolidated financial statements.
|
| | | | | | | | | | | |
| FARMER BROS. CO. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| (In thousands) |
| | For the Years Ended June 30, |
| | 2019 | | 2018 | | 2017 |
| Cash flows from operating activities: | | | | | |
| Net (loss) income | $ | (73,595 | ) | | $ | (18,280 | ) | | $ | 22,551 |
|
| Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
| Depreciation and amortization | 31,065 |
| | 30,464 |
| | 22,970 |
|
| Provision for doubtful accounts | 1,363 |
| | 137 |
| | 325 |
|
| Impairment losses on intangible assets | — |
| | 3,820 |
| | — |
|
| Change in estimated fair value of contingent earnout consideration | — |
| | (500 | ) | | — |
|
| Restructuring and other transition expenses, net of payments | 1,172 |
| | (1,185 | ) | | 1,034 |
|
| Interest on sale-leaseback financing obligation | — |
| | — |
| | 681 |
|
| Deferred income taxes | 41,654 |
| | 17,155 |
| | 14,343 |
|
| Pension settlement cost | 10,948 |
| | — |
| | — |
|
| Net gain from sale of Torrance Facility | — |
| | — |
| | (37,449 | ) |
| Net gains from sales of Spice Assets and other assets | 466 |
| | (995 | ) | | (2,129 | ) |
| ESOP and share-based compensation expense | 3,674 |
| | 3,822 |
| | 3,959 |
|
| Net losses on derivative instruments and investments | 9,196 |
| | 1,982 |
| | 2,361 |
|
| Change in operating assets and liabilities: |
| Accounts receivable | 2,757 |
| | (4,628 | ) | | (14 | ) |
| Inventories | 16,192 |
| | (15,513 | ) | | (8,041 | ) |
| Derivative (liabilities) assets, net | (18,901 | ) | | (7,782 | ) | | 2,264 |
|
| Other assets | 114 |
| | 1,073 |
| | 22,932 |
|
| Accounts payable | 16,546 |
| | 3,864 |
| | 8,885 |
|
| Accrued expenses and other liabilities | (7,201 | ) | | (4,579 | ) | | (12,560 | ) |
| Net cash provided by operating activities | $ | 35,450 |
| | $ | 8,855 |
| | $ | 42,112 |
|
| Cash flows from investing activities: |
| Acquisitions of businesses, net of cash acquired | $ | — |
| | $ | (39,608 | ) | | $ | (25,853 | ) |
| Purchases of property, plant and equipment | (34,760 | ) | | (35,443 | ) | | (45,195 | ) |
| Purchases of assets for construction of New Facility | — |
| | (1,577 | ) | | (39,754 | ) |
| Proceeds from sales of property, plant and equipment | 2,399 |
| | 1,988 |
| | 4,078 |
|
| Net cash used in investing activities | $ | (32,361 | ) | | $ | (74,640 | ) | | $ | (106,724 | ) |
| Cash flows from financing activities: |
| Proceeds from revolving credit facility | $ | 50,642 |
| | $ | 85,315 |
| | $ | 77,985 |
|
| Repayments on revolving credit facility | (48,429 | ) | | (23,149 | ) | | (50,473 | ) |
| Proceeds from sale-leaseback financing obligation | — |
| | — |
| | 42,455 |
|
| Proceeds from New Facility lease financing obligation | — |
| | — |
| | 16,346 |
|
| Repayments of New Facility lease financing | — |
| | — |
| | (35,772 | ) |
| Payments of capital lease obligations | (215 | ) | | (947 | ) | | (1,433 | ) |
| Payment of financing costs | (1,049 | ) | | (579 | ) | | — |
|
| Proceeds from stock option exercises | 507 |
| | 1,342 |
| | 688 |
|
| Tax withholding payment - net share settlement of equity awards | — |
| | — |
| | (38 | ) |
| Net cash provided by financing activities | $ | 1,456 |
| | $ | 61,982 |
| | $ | 49,758 |
|
| Net (decrease) increase in cash and cash equivalents | $ | 4,545 |
| | $ | (3,803 | ) | | $ | (14,854 | ) |
| Cash and cash equivalents at beginning of year | 2,438 |
| | 6,241 |
| | 21,095 |
|
| Cash and cash equivalents at end of year | $ | 6,983 |
| | $ | 2,438 |
| | $ | 6,241 |
|
The accompanying notes are an integral part of these consolidated financial statements.
|
| | | | | | | | | | | |
| FARMER BROS. CO. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) |
| (In thousands) |
| | For the Years Ended June 30, |
| | 2019 | | 2018 | | 2017 |
| Supplemental disclosure of cash flow information: | | | | | |
| Cash paid for interest | $ | 5,512 |
| | $ | 3,177 |
| | $ | 1,504 |
|
| Cash paid for income taxes | $ | 107 |
| | $ | 144 |
| | $ | 567 |
|
| Supplemental disclosure of non-cash investing and financing activities: | | | | | |
| Equipment acquired under capital leases | $ | — |
| | $ | — |
| | $ | 417 |
|
Net change in derivative assets and liabilities included in other comprehensive (loss) income, net of tax | $ | (2 | ) | | $ | (5,122 | ) | | $ | (2,390 | ) |
| Non-cash additions to property, plant and equipment | $ | 2,619 |
| | $ | 2,814 |
| | $ | 5,517 |
|
| Non-cash portion of earnout receivable recognized—Spice Assets sale | $ | — |
| | $ | 298 |
| | $ | 419 |
|
| Non-cash portion of earnout payable recognized—China Mist acquisition | $ | — |
| | $ | — |
| | $ | 500 |
|
| Non-cash portion of earnout payable recognized—West Coast Coffee acquisition | $ | 400 |
| | $ | — |
| | $ | 600 |
|
| Non-cash working capital adjustment payable recognized—China Mist acquisition | $ | — |
| | $ | — |
| | $ | 553 |
|
| Non-cash receivable from West Coast Coffee—post-closing final working capital adjustment | $ | — |
| | $ | 218 |
| | $ | — |
|
| Non-cash post-closing working capital adjustment—Boyd Coffee acquisition | $ | 2,277 |
| | $ | 1,056 |
| | $ | — |
|
| Non-cash Issuance of 401-K shares of Common Stock | $ | 37 |
| | $ | — |
| | $ | — |
|
| Non-cash consideration given-Issuance of Series A Preferred Stock | $ | — |
| | $ | 11,756 |
| | $ | — |
|
| Option costs paid with exercised shares |
| | $ | — |
| | $ | 550 |
|
| Cumulative preferred dividends, undeclared and unpaid | $ | 534 |
| | $ | 389 |
| | $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
FARMER BROS. CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Introduction and Basis of Presentation
Description of Business
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company,” or “Farmer Bros.”), is a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products. The Company serves a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurant, department and convenience store chains, hotels, casinos, healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand and consumer-branded coffee and tea products, and foodservice distributors. The Company’s product categories consist of roast and ground coffee, frozen liquid coffee; flavored and unflavored iced and hot teas; culinary products; spices; and other categoriesbeverages including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee. The Company was founded in 1912, incorporated in California in 1923, and reincorporated in Delaware in 2004. In fiscal 2017, the Company completed the construction and relocation of earnings, even whenits corporate headquarter from Torrance, California to Northlake, Texas ("Northlake facility"), and began roasting coffee in the Northlake facility in the fourth quarter of fiscal 2017. The Company operates in one business segment.
The Company operates production facilities in Northlake, Texas; Houston, Texas; Portland, Oregon; and Hillsboro, Oregon. Distribution takes place out of the Northlake facility, the Portland and Hillsboro facilities, as well as separate distribution centers in Northlake, Illinois; Moonachie, New Jersey; and Scottsdale, Arizona.
The Company’s products reach its customers primarily in the following ways: through the Company’s nationwide direct-store-delivery or DSD network of 380 delivery routes and 104 branch warehouses as of June 30, 2019, or direct-shipped via common carriers or third-party distributors. The Company operates a valuation allowance has been established againstlarge fleet of trucks and other vehicles to distribute and deliver its products through its DSD network, and relies on third-party logistic (“3PL”) service providers for its long-haul distribution. DSD sales are primarily made “off-truck” by the 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 componentCompany to its customers at their places of OCI, is considered when determining whether sufficient future taxable income exists to realize the deferred tax assets.business.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
As aNote 2. Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements are prepared in accordance with the generally accepted accounting principles in the United States (“GAAP”).
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries. All inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. The Company reviews its estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates and actual results may differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original maturity dates of 90 days or less to be cash equivalents. Fair values of cash equivalents approximate cost due to the short period of time to maturity.
Allowance for doubtful accounts
A portion of our accounts receivable is not expected to be collected due to non-payment, bankruptcies and deductions. Our accounting policy for the fiscalallowance for doubtful accounts requires us to reserve an amount based on the evaluation of the aging of accounts receivable, detailed analysis of high-risk customers’ accounts, and the overall market and economic conditions of our customers. This evaluation considers the customer demographic, such as large commercial customers as compared to small businesses or individual customers. We consider our accounts receivable delinquent or past due based on payment terms established with each customer. Accounts receivable are written off when the account are determined to be uncollectible.
Investments
The Company’s investments, from time to time, consist of money market instruments, marketable debt, equity and hybrid securities. Investments are held for trading purposes and stated at fair value. The cost of investments sold is determined on the specific identification method. Dividend and interest income are accrued as earned.
Fair Value Measurements
The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
•Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.
•Level 2—Valuation is based upon inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (i.e. interest rate and yield curves observable at commonly quoted intervals, default rates, etc.). Observable inputs include quoted prices for similar instruments in active and non-active markets. Level 2 includes those financial instruments that are valued with industry standard valuation models that incorporate inputs that are observable in the marketplace throughout the full term of the instrument, or can otherwise be derived from or supported by observable market data in the marketplace. Level 2 inputs may also include insignificant adjustments to market observable inputs.
•Level 3—Valuation is based upon one or more unobservable inputs that are significant in establishing a fair value estimate. These unobservable inputs are used to the extent relevant observable inputs are not available and are developed based on the best information available. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Securities with quotes that are based on actual trades or actionable bids and offers with a sufficient level of activity on or near the measurement date are classified as Level 1. Securities that are priced using quotes derived from implied values, indicative bids and offers, or a limited number of actual trades, or the same information for securities that are similar in many respects to those being valued, are classified as Level 2. If market information is not available for securities being valued, or materially-comparable securities, then those securities are classified as Level 3. In considering market information, management evaluates changes in liquidity, willingness of a broker to execute at the quoted price, the depth and consistency of prices from pricing services, and the existence of observable trades in the market.
Derivative Instruments
The Company executes various derivative instruments to hedge its commodity price and interest rate risks. These derivative instruments consist primarily of forward, option and swap contracts. The Company reports the fair value of derivative instruments on its consolidated balance sheets in “Short-term derivative assets,” “Long-term derivative assets,” “Short-term derivative liabilities,” or “Other long-term liabilities.” The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades and reports these amounts on a gross basis. Additionally, the Company reports, if any, cash held on deposit in margin accounts for coffee-related derivative instruments on a gross basis on its consolidated balance sheet in “Restricted cash.”
The accounting for the changes in fair value of the Company's derivative instruments can be summarized as follows: |
| | |
| Derivative Treatment | | Accounting Method |
| Normal purchases and normal sales exception | | Accrual accounting |
| Designated in a qualifying hedging relationship | | Hedge accounting |
| All other derivative instruments | | Mark-to-market accounting |
The Company enters into green coffee purchase commitments at a fixed price or at a price to be fixed (“PTF”). PTF contracts are purchase commitments whereby the quality, quantity, delivery period, price differential to the coffee “C” market price and other negotiated terms are agreed upon, but the date, and therefore the price at which the base “C” market price will be fixed has not yet been established. The coffee “C” market price is fixed at some point after the purchase contract date and before the futures market closes for the delivery month and may be fixed either at the direction of the Company to the vendor, or by the application of a derivative that was separately purchased as a hedge. For both fixed-price and PTF contracts, the Company expects to take delivery of and to utilize the coffee in a reasonable period of time and in the conduct of normal business. Accordingly, these purchase commitments qualify as normal purchases and are not recorded at fair value on the Company's consolidated balance sheets.
The Company follows the guidelines of Accounting Standards Codification (“ASC”) 815, “Derivatives and Hedging” (“ASC 815”), to account for certain coffee-related derivative instruments as accounting hedges, in order to minimize the volatility created in the Company's quarterly results from utilizing these derivative instruments and to improve comparability between reporting periods. For a derivative to qualify for designation in a hedging relationship, it must meet specific criteria and the Company must maintain appropriate documentation. The Company establishes hedging relationships pursuant to its risk management policies. The hedging relationships are evaluated at inception and on an ongoing basis to determine whether the hedging relationship is, and is expected to remain, highly effective in achieving offsetting changes in fair value or cash flows attributable to the underlying risk being hedged. The Company also regularly assesses whether the hedged forecasted transaction is probable of occurring. If a derivative ceases to be or is no longer expected to be highly effective, or if the Company believes the likelihood of occurrence of the hedged forecasted transaction is no longer probable, hedge accounting is discontinued for that derivative, and future changes in the fair value of that derivative are recognized in “Other, net.”
For coffee-related derivative instruments designated as cash flow hedges, the change in fair value of the derivative is reported as accumulated other comprehensive income (loss) (“AOCI”) and subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. Gains or losses deferred in AOCI associated with terminated derivative instruments, derivative instruments that cease to be highly effective hedges, derivative instruments for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, any gain or loss deferred in AOCI is recognized in “Other, net” at that time. For derivative instruments that are not designated in a hedging relationship, and for which the normal purchases and normal sales exception has not been elected, the changes in fair value are reported in “Other, net.” See Note 8.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
For interest rate swap derivative instruments designated as a cash flow hedge, the change in fair value of the derivative is reported as AOCI and subsequently reclassified into interest expense in the period or periods when the hedged transaction affects earnings.
Concentration of Credit Risk
At June 30, 2019, the financial instruments which potentially expose the Company to concentration of credit risk consist of cash in financial institutions (in excess of federally insured limits), derivative instruments and trade receivables.
The Company does not have any credit-risk related contingent features that would require it to post additional collateral in support of its net derivative liability positions. At June 30, 2019 and 2018, none of the cash in the Company’s coffee-related derivative margin accounts was restricted. Further changes in commodity prices and the number of coffee-related derivative instruments held, could have a significant impact on cash deposit requirements under certain of the Company's broker and counterparty agreements.
Approximately 28% and 20% of the Company’s trade accounts receivable balance was with five customers at June 30, 2019 and 2018, respectively. The Company estimates its maximum credit risk for accounts receivable at the amount recorded on the balance sheet. The trade accounts receivables are generally short-term and all probable bad debt losses have been appropriately considered in establishing the allowance for doubtful accounts.
Inventories
Inventories are valued at the lower of cost or net realizable value. Effective June 30, 2018, the Company changed its method of accounting for coffee, tea and culinary products from the last in, first out (“LIFO”) basis to the first in, first out ("FIFO") basis. The impact of this change in accounting principle has been reflected through retrospective application to the financial statements for each period presented. The Company continues to account for coffee brewing equipment parts on a FIFO basis. The Company regularly evaluates these inventories to determine the provision for obsolete and slow-moving inventory. Inventory reserves are based on inventory obsolescence trends, historical experience and application of specific identification.
Property, Plant and Equipment
Property, plant and equipment is carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method. The following useful lives are used:
|
| |
| Buildings and facilities | 10 to 30 years |
| Machinery and equipment | 3 to 10 years |
| Equipment under capital leases | Shorter of term of lease or estimated useful life |
| Office furniture and equipment | 5 to 7 years |
| Capitalized software | 3 to 5 years |
Leasehold improvements are depreciated on a straight-line basis over the lesser of the estimated useful life of the asset or the remaining lease term. When assets are sold or retired, the asset and related accumulated depreciation are removed from the respective account balances and any gain or loss on disposal is included in operations. Maintenance and repairs are charged to expense, and enhancements are capitalized.
Coffee Brewing Equipment and Service
The Company capitalizes coffee brewing equipment and depreciates it over five years and reports the depreciation expense in cost of goods sold. See Note 11 for details of the depreciation amounts. Other non-depreciation expenses related to coffee brewing equipment provided to customers, such as the cost of servicing that equipment (including service employees’ salaries, cost of transportation and the cost of supplies and parts), are considered directly attributable to the generation of revenues from the customers. These non-depreciation expenses are also included in cost of goods sold, and were $33.9 million, $30.2 million and $26.3 million, for the years ended June 30, 2016, 20152019, 2018 and 2014,2017, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Leases
Leases are categorized as either operating or capital leases at inception. Operating lease costs are recognized on a straight-line basis over the Company recorded income tax expense of$2.0 million, $0,term of the lease. An asset and $0, respectively, in OCI related to the gain on postretirement benefits, and recorded a corresponding liability for the capital lease obligation are established for the cost of a capital lease. Capital lease obligations are amortized over the life of the lease.
Income Taxes
Deferred income tax benefit of $2.0 million, $0, and $0, respectively, in continuing operations.
A reconciliation of income tax (benefit) expense to the federal statutory tax rate is as follows:
|
| | | | | | | | | | | | |
| | | June 30, |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Statutory tax rate | | 35 | % | | 34 | % | | 34 | % |
| Income tax expense at statutory rate | | $ | 3,472 |
| | $ | 358 |
| | $ | 4,365 |
|
| State income tax expense, net of federal tax benefit | | 557 |
| | 260 |
| | 749 |
|
| Dividend income exclusion | | (140 | ) | | (54 | ) | | — |
|
| Valuation allowance | | (83,230 | ) | | (185 | ) | | (4,292 | ) |
| Change in tax rate | | (1,061 | ) | | — |
| | — |
|
| Retiree life insurance | | 135 |
| | — |
| | — |
|
| Change in contingency reserve (net) | | — |
| | — |
| | (39 | ) |
| Other (net) | | 270 |
| | 23 |
| | (78 | ) |
| Income tax (benefit) expense | | $ | (79,997 | ) | | $ | 402 |
| | $ | 705 |
|
The primary components oftaxes 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 give risedifferences are expected to reverse. Estimating the Company’s tax liabilities involves judgments related to uncertainties in the application of complex tax regulations. The Company makes certain estimates and judgments to determine tax expense for financial statement purposes as it evaluates the effect of tax credits, tax benefits and deductions, some of which result from differences in the timing of recognition of revenue or expense for tax and financial statement purposes. Changes to these estimates may result in significant changes to the Company’s net deferred tax liabilities are as follows:
|
| | | | | | | | | | | | |
| | | June 30, |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Deferred tax assets: | | | | | | |
| Postretirement benefits | | $ | 33,273 |
| | $ | 31,100 |
| | $ | 19,800 |
|
| Accrued liabilities | | 11,760 |
| | 10,091 |
| | 6,156 |
|
| Net operating loss carryforwards | | 38,196 |
| | 41,544 |
| | 40,275 |
|
| Intangible assets | | 71 |
| | 594 |
| | 1,126 |
|
| Other | | 6,881 |
| | 6,794 |
| | 7,253 |
|
| Total deferred tax assets | | 90,181 |
| | 90,123 |
| | 74,610 |
|
| Deferred tax liabilities: | | | | | | |
| Unrealized gain on investments | | (609 | ) | | (2,242 | ) | | — |
|
| Fixed assets | | (5,370 | ) | | (2,647 | ) | | (1,902 | ) |
| Other | | (1,789 | ) | | (1,943 | ) | | (1,538 | ) |
| Total deferred tax liabilities | | (7,768 | ) | | (6,832 | ) | | (3,440 | ) |
| Valuation allowance | | (1,627 | ) | | (84,857 | ) | | (72,613 | ) |
| Net deferred tax assets (liabilities) | | $ | 80,786 |
| | $ | (1,566 | ) | | $ | (1,443 | ) |
At June 30, 2016,provision in future periods. Each fiscal quarter the Company had approximately $99.7 million in federalre-evaluates its tax provision and $88.6 million in state net operating loss carryforwards that will begin to expire in the years ending June 30, 2030reconsiders its estimates and June 30, 2017, respectively. Additionally, at June 30, 2016, the Company had $0.8 million of federal business tax credits that begin to expire in June 30, 2025.
As of June 30, 2016, the Company has generated approximately $1.2 million of excess tax benefitsassumptions related to stock compensation, the benefit of which will be recorded to additional paid in capital if and when realized.
At June 30, 2016, the Company had total deferredspecific tax assets of $90.2 million and net deferred tax assets before valuation allowance of $82.4 million.liabilities, making adjustments as circumstances change.
Deferred Tax Asset Valuation Allowance
The Company evaluated itevaluates its deferred tax assets quarterly to determine if a valuation allowance is required. In the fourth quarter of fiscal 2016, the Company consideredrequired and considers whether a valuation allowance should be recorded against deferred tax assets based on the likelihood that the benefits of the deferred tax assets wouldwill or wouldwill not ultimately be realized in future periods. In making
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
such this assessment, significant weight wasis given to evidence that couldcan be objectively verified, such as recent operating results, and less consideration wasis given to less objective indicators, such as future income projections. After consideration of positive and negative evidence, including the recent history of income,if the Company concludeddetermines that it is more likely than not that the Companyit will generate future income sufficient to realize its deferred tax assets, the majorityCompany will record a reduction in the valuation allowance.
Revenue Recognition
The Company recognizes revenue in accordance with the way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. The Company performs the following steps to determine revenue recognition for an arrangement: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the performance obligations are satisfied.
Net (Loss) Income Per Common Share
Net (loss) income per share (“EPS”) represents net (loss) income available to common stockholders divided by the weighted-average number of common shares outstanding for the period, excluding unallocated shares held by the Company's Employee Stock Ownership Plan (“ESOP”). Dividends on the Company's outstanding Series A Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share ("Series A Preferred Stock"), that the Company has paid or intends to pay are deducted from net (loss) income in computing net (loss) income available to common stockholders.
Under the two-class method, net (loss) income available to nonvested restricted stockholders and holders of Series A Preferred Stock is excluded from net (loss) income available to common stockholders for purposes of calculating basic and diluted EPS.
Diluted EPS represents net income available to holders of common stock divided by the weighted-average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period. Common equivalent shares include potentially dilutive shares from share-based compensation including stock options, unvested restricted stock, performance-based restricted stock units, and shares of Series A Preferred Stock, as converted, because they are deemed participating securities. In the absence of contrary information, the Company assumes 100% of the target shares are issuable under performance-based restricted stock units.
The dilutive effect of Series A Preferred Stock is reflected in diluted EPS by application of the if-converted method. In applying the if-converted method, conversion will not be assumed for purposes of computing diluted EPS if the effect would
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
be anti-dilutive. The Series A Preferred Stock is antidilutive whenever the amount of the dividend declared or accumulated in the current period per common share obtainable upon conversion exceeds basic EPS.
Employee Stock Ownership Plan
Compensation cost for the ESOP is based on the fair market value of shares released or deemed to be released to employees in the period in which they are committed. As a leveraged ESOP with the Company as lender, a contra equity account is established to offset the Company’s note receivable. The contra account will change as compensation expense is recognized. The cost of shares purchased by the ESOP which have not been committed to be released or allocated to participants are shown as a contra-equity account “Unearned ESOP Shares” and are excluded from EPS calculations.
On December 31, 2018, the Company froze the ESOP such that (i) no employees of the Company may commence participation in the ESOP on or after December 31, 2018; (ii) no Company contributions will be made to the ESOP with respect to services performed or compensation received after December 31, 2018; and (iii) the ESOP accounts of all individuals who are actively employed by the Company and participating in the ESOP on December 31, 2018 will be fully vested as of such date. Additionally, the Administrative Committee, with the consent of the Board of Directors, designated certain employees who were terminated in connection with certain reductions-in-force in 2018 to be fully vested in their ESOP accounts as of their severance dates.
Effective January 1, 2019, the Company amended and restated its 401(k) Plan to, among other things, provide for annual contribution of shares of the Company’s deferred tax assetscommon stock equal to 4% of each eligible participant’s annual plan compensation. See Note 13 for details. Share-based Compensation
The Company measures all share-based compensation cost at the grant date, based on the fair values of the awards that are ultimately expected to vest, and recognizes that cost as an expense on a straight line-basis in its consolidated statements of June 30, 2016. Accordingly,operations over the requisite service period. Fair value of restricted stock and performance-based restricted stock units is the closing price of the Company's common stock on the date of grant. The Company estimates the fair value of option awards using the Black-Scholes option valuation model, which requires management to make certain assumptions for estimating the fair value of stock options at the date of grant.
In addition, the Company estimates the expected impact of forfeited awards and recognizes share-based compensation cost only for those awards ultimately expected to vest. If actual forfeiture rates differ materially from the Company’s estimates, share-based compensation expense could differ significantly from the amounts the Company has recorded a reduction in its valuation allowance in fiscal 2016 in the amountcurrent period. The Company periodically reviews actual forfeiture experience and will revise its estimates, as necessary. The Company will recognize as compensation cost the cumulative effect of $83.2 million.the change in estimated forfeiture rates on current and prior periods in earnings of the period of revision. As a result, if the Company revises its assumptions and estimates, the Company’s share-based compensation expense could change materially in the future.
The Company's outstanding share-based awards include performance-based non-qualified stock options ("PNQs") and performance-based restricted stock units ("PBRSUs") that have performance-based vesting conditions in addition to time-based vesting. Awards with performance-based vesting conditions require the achievement of certain financial and other performance criteria as a condition to the vesting. The Company recognizes the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the service period based upon the Company’s determination of whether it is probable that the performance targets will be achieved. At each reporting period, the Company reassesses the probability of achieving the performance criteria and the performance period required to meet those targets. Determining whether the performance criteria will be achieved involves judgment, and the estimate of share-based compensation expense may be revised periodically based on changes in the probability of achieving the performance criteria. Revisions are reflected in the period in which the estimate is changed. If performance goals are not met, no share-based compensation expense is recognized for the cancelled PNQs or PBRSUs, and, to the extent share-based compensation expense was previously recognized for those cancelled PNQs or PBRSUs, such share-based compensation expense is reversed. If performance goals are exceeded and the payout is more than 100% of the target shares in the case of PBRSUs, additional compensation expense is recorded in the period when that determination is certified by the Compensation Committee of the Board of Directors.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Impairment of Goodwill and Indefinite-lived Intangible Assets
The Company cannot concludeaccounts for its goodwill and indefinite-lived intangible assets in accordance with Accounting Standards Codification ("ASC") 350, “Intangibles-Goodwill and Other” (“ASC 350”). Goodwill and other indefinite-lived intangible assets are not amortized but instead are reviewed for impairment annually, or more frequently if an event occurs or circumstances change which indicate that certain state net operating loss carry forwards and tax credit carryovers willan asset might be utilized before expiration. Accordingly,impaired. Pursuant to ASC 350, the Company will maintainperforms a valuation allowancequalitative assessment of $1.6 milliongoodwill and indefinite-lived intangible assets on its consolidated balance sheets, to offset this deferred tax asset. The valuation allowance decreased $83.2 million and $12.3 million, respectively, in fiscal 2016 and 2015 and increased $9.9 million in fiscal 2014. The Company will continue to monitor all available evidence, both positive and negative, in determining whether itdetermine if there is a more likely than not indication that its goodwill and indefinite-lived intangible assets are impaired as of January 31. If the indicators of impairment are present, the Company performs a quantitative assessment to determine the impairment of these assets as of the measurement date.
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 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 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.
Indefinite-lived intangible assets consist of certain acquired trademarks, trade names and a brand name. Indefinite-lived intangible assets are tested for impairment by comparing their fair values to their carrying values. An impairment charge is recorded if the estimated fair value of such assets has decreased below their carrying values.
Other Intangible Assets
Other intangible assets consist of finite-lived intangible assets including acquired recipes, non-compete agreements, customer relationships, a trade name/brand name and certain trademarks. These assets are amortized over their estimated useful lives and are tested for impairment by grouping them with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. The Company reviews the recoverability of its finite-lived intangible assets whenever events or changes in circumstances indicate that the Company will realize its remaining deferred tax assets.carrying amount of such assets may not be recoverable.
A tabular reconciliation of the total amounts (in absolute values) of unrecognized tax benefits is as follows:
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2016 | | 2015 | | 2014 |
| Unrecognized tax benefits at beginning of year | | $ | — |
| | $ | — |
| | $ | 3,211 |
|
| Decreases in tax positions for prior years | | — |
| | — |
| | (30 | ) |
| Settlements | | — |
| | — |
| | (3,181 | ) |
| Unrecognized tax benefits at end of year | | $ | — |
| | $ | — |
| | $ | — |
|
At June 30, 2016Shipping and 2015, the Company has no unrecognized tax benefits.
The Company made a determination in the quarter ended June 30, 2014 that it would not, at that time, pursue certain refund claims requested on its amended tax returns for the fiscal years ended June 30, 2003 through June 30, 2008. The Internal Revenue Service previously denied these refund claims upon audit and maintained that decision upon appeal. The Company released its tax reserve related to these refunds in the fourth quarter of fiscal 2014.
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, 2012. The Internal Revenue Service is currently auditing the Company's tax years ended June 30, 2013 and 2014.Handling Costs
The Company’s policy isshipping and handling costs are included in both cost of goods sold and selling expenses, depending on the nature of such costs. Shipping and handling costs included in cost of goods sold reflect inbound freight of raw materials and finished goods, and product loading and handling costs at the Company’s production facilities to recognize interest expensethe distribution centers and penalties relatedbranches. Shipping and handling costs included in selling expenses consist primarily of those costs associated with moving finished goods to income tax matterscustomers. Shipping and handling costs that were recorded as a component of income tax expense. In each of the fiscal years ended June 30, 2016Company's selling expenses were $11.4 million, $11.9 million and 2015, the Company recorded $0 in accrued interest and penalties associated with uncertain tax positions. Additionally, the Company recorded income of $0 related to interest and penalties on uncertain tax positions$10.7 million, respectively, in the fiscal years ended June 30, 2019, 2018 and 2017.
Collective Bargaining Agreements
Certain Company employees are subject to collective bargaining agreements which expire on or before June 30, 2022. At June 30, 2019 approximately 28% of the Company's workforce was covered by such agreements.
Self-Insurance
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liability of certain risks including workers’ compensation, health care benefits, general liability, product liability, property insurance and director and officers’ liability insurance. Liabilities associated with risks retained by the Company are not discounted and are estimated by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The Company's self-insurance for workers’ compensation liability includes estimated outstanding losses of unpaid claims, and allocated loss adjustment expenses (“ALAE”), case reserves, the development of known claims and incurred but not reported claims. ALAE are the direct expenses for settling specific claims. The amounts reflect per occurrence and annual aggregate limits maintained by the Company. The estimated liability analysis does not include estimating a provision for unallocated loss adjustment expenses.
The estimated gross undiscounted workers’ compensation liability relating to such claims was $6.3 million and $7.1 million, as of June 30, 2019 and 2018, respectively and the estimated recovery from reinsurance was $0.9 million for both periods. The short-term and long-term accrued liabilities for workers’ compensation claims are presented on the Company's consolidated balance sheets in “Other current liabilities” and in “Accrued workers' compensation liabilities,” respectively. The estimated insurance receivable is included in “Other assets” on the Company's consolidated balance sheets.
At June 30, 2019 the Company had posted $1.4 million in cash and a $2.3 million letter of credit, and at June 30, 2018 the Company had posted $2.3 million in cash and a $2.0 million letter of credit, as a security deposit for self-insuring workers’ compensation, general liability and auto insurance coverages.
The estimated liability related to the Company's self-insured group medical insurance at June 30, 2019 and 2018 was $0.9 million and $1.6 million, respectively, recorded on an incurred but not reported basis, within deductible limits, based on actual claims and the average lag time between the date insurance claims are filed and the date those claims are paid.
The Company is self-insured for general liability, product liability and commercial auto liability and accrues the cost of the insurance based on estimates of the aggregate liability claims incurred using certain actuarial assumptions and historical claims experience. The Company's liability reserve for such claims was $1.0 million and $1.7 million at June 30, 2019 and 2018, respectively. The estimated liability related to the Company's self-insured group medical insurance, general liability, product liability and commercial auto liability is included on the Company's consolidated balance sheets in “Other current liabilities.”
Pension Plans
The Company’s defined benefit pension plans are not admitting new participants, therefore, changes to pension liabilities are primarily due to market fluctuations of investments for existing participants and changes in interest rates. The Company’s defined benefit pension plans are accounted for using the guidance of ASC 710, “Compensation—General“ and ASC 715, “Compensation-Retirement Benefits“ and are measured as of the end of the fiscal year.
The Company recognizes the overfunded or underfunded status of a defined benefit pension as an asset or liability on its consolidated balance sheets. Changes in the funded status are recognized through AOCI, in the year in which the changes occur. See Note 13.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. The purchase price of each business acquired is allocated to the tangible and intangible assets acquired and the liabilities assumed based on information regarding their respective fair values on the date of acquisition. Any excess of the purchase price over the fair value of the separately identifiable assets acquired and the liabilities assumed is allocated to goodwill. Management determines the fair values used in purchase price allocations for intangible assets based on historical data, estimated discounted future cash flows, and expected royalty rates for trademarks and trade names, as well as certain other information. The valuation of assets acquired and liabilities assumed requires a number of judgments and is subject to revision as additional information about the fair value of assets and liabilities becomes available. Additional information, which existed as of the acquisition date but unknown to the Company at that time, may become known during the remainder of the measurement period, a period not to exceed twelve months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill and intangible assets. If such an adjustment is required, the Company will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. Transaction costs, including legal, accounting and integration expenses, are expensed as incurred and are included in operating expenses in the Company's consolidated statements of operations. Contingent consideration, such as earnout, is deferred as a short-term or long-term liability based on an estimate of the timing of the future payment. These contingent consideration liabilities are recorded at fair value on the acquisition date and are re-measured quarterly based on the then assessed fair value and adjusted if necessary. The results of operations of businesses acquired are included in the Company's consolidated financial statements from their dates of acquisition.
Restructuring Plans
The Company accounts for exit or disposal of activities in accordance with ASC 420, “Exit or Disposal Cost Obligations.“ The Company defines a business restructuring as an exit or disposal activity that includes but is not limited to a program which is planned and controlled by management and materially changes either the scope of a business or the manner in which that business is conducted. Business restructuring charges may include (i) one-time termination benefits related to employee separations, (ii) contract termination costs and (iii) other related costs associated with exit or disposal activities.
A liability is recognized and measured at its fair value for one-time termination benefits once the plan of termination is communicated to affected employees and it meets all of the following criteria: (i) management commits to a plan of termination, (ii) the plan identifies the number of employees to be terminated and their job classifications or functions, locations and the expected completion date, (iii) the plan establishes the terms of the benefit arrangement and (iv) it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. Contract termination costs include costs to terminate a contract or costs that will continue to be incurred under the contract without benefit to the Company. A liability is recognized and measured at its fair value when the Company either terminates the contract or ceases using the rights conveyed by the contract.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Recently Adopted Accounting Standards
In March 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-05 which amends ASC 740, “Income Taxes,” to provide guidance on accounting for the tax effects of the Tax Cuts and Jobs Act enacted on December 22, 2017 (the “Tax Act”) pursuant to Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. Under SAB 118, companies are able to record a reasonable estimate of the impact of the Tax Act if one is able to be determined and report it as a provisional amount during the measurement period. The measurement period is not to extend beyond one year from the enactment date. The Company finalized its assessment of the income tax effects of the Tax Act in the second quarter of fiscal 2019.
In March 2017, the FASB issued ASU 2017-07 to amend the requirements in GAAP related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. ASU 2017-07 updated the guidance on the presentation of net periodic pension cost and net periodic post-retirement pension cost, and requires the service cost component to be presented in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The amendments in this update also allow only the service cost component to be eligible for capitalization when applicable. The guidance in ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Entities are required to use a retrospective transition method to adopt the requirement for separate income statement presentation of the service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. The Company adopted ASU 2017-07 beginning July 1, 2018 using a retrospective transition method. See the impact of the adoption of ASU 2017-07 in the table below.
In January 2017, the FASB issued ASU 2017-01 to clarify the definition of a business. The objective of adding the guidance is to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses and provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace the missing elements. The guidance in ASU 2017-01 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, and should be applied prospectively. The Company adopted ASU 2017-01 beginning July 1, 2018. The Company have applied the new guidance to all applicable transactions after the adoption date.
In November 2016, the FASB issued ASU 2016-18 that requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. An entity with a material balance of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. The guidance in ASU 2016-18 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-18 beginning July 1, 2018. Adoption of ASU 2016-18 did not have a material effect on the results of operations, financial position or cash flows of the Company.
In August 2016, the FASB issued ASU 2016-15 to address certain issues where diversity in practice was identified in classifying certain cash receipts and cash payments based on the guidance in ASC 230, “Statement of Cash Flows” (“ASC 230”). ASC 230 is principles based and often requires judgment to determine the appropriate classification of cash flows as operating, investing or financing activities. The application of judgment has resulted in diversity in how certain cash receipts and cash payments are classified. Certain cash receipts and cash payments may have aspects of more than one class of cash flows. ASU 2016-15 clarifies that an entity will first apply any relevant guidance in ASC 230 and in other applicable topics. If there is no guidance that addresses those cash receipts and cash payments, an entity will determine each separately identifiable source or use and classify the receipt or payment based on the nature of the cash flow. If a receipt or payment has aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. The guidance in ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-15 beginning July 1, 2018. Adoption of ASU 2016-15 did not have a material effect on the results of operations, financial position or cash flows of the Company.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
In May 2014, the FASB issued ASU 2014-09 to amend the accounting guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 replaces most existing revenue recognition guidance in GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In 2015 and 2014, respectively.2016, the FASB issued additional ASUs related to ASU 2014-09 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identification of performance obligations, and accounting for licenses, and included other improvements and practical expedients. ASU 2014-09 is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2014-09 beginning July 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. Adoption of ASU 2014-09 did not have a material effect on the results of operations, financial position or cash flows of the Company. The Company has included expanded disclosures in this report related to revenue recognition in order to comply with ASU 2014-09. See Note 23. Note 21. Net Income Per Common ShareAdoption of ASU 2017-07
The Company adopted ASU 2017-07 on July 1, 2018 using the retrospective transition method.
The adoption of this accounting standard resulted in a change in certain previously reported amounts, as follows:
|
| | | | | | | | | | | | |
| | | Year ended June 30, |
| (In thousands, except share and per share amounts) | | 2016 | | 2015 | | 2014 |
| Net income attributable to common stockholders—basic | | $ | 89,812 |
| | $ | 651 |
| | $ | 12,063 |
|
| Net income attributable to nonvested restricted stockholders | | 106 |
| | 1 |
| | 69 |
|
| Net income | | $ | 89,918 |
| | $ | 652 |
| | $ | 12,132 |
|
| | | | | | | |
| Weighted average common shares outstanding—basic | | 16,502,523 |
| | 16,127,610 |
| | 15,909,631 |
|
| Effect of dilutive securities: | | | | | | |
| Shares issuable under stock options | | 124,879 |
| | 139,524 |
| | 104,956 |
|
| Weighted average common shares outstanding—diluted | | 16,627,402 |
| | 16,267,134 |
| | 16,014,587 |
|
| Net income per common share—basic | | $ | 5.45 |
| | $ | 0.04 |
| | $ | 0.76 |
|
| Net income per common share—diluted | | $ | 5.41 |
| | $ | 0.04 |
| | $ | 0.76 |
|
|
| | | | | | | | | | | | |
| | | For the Year Ended June 30, 2018 |
| (In thousands) | | As Previously Reported | | ASU 2017-07 Adjustments | | As Adjusted |
| Cost of goods sold | | $ | 399,502 |
| | $ | (347 | ) | | $ | 399,155 |
|
| Gross profit | | $ | 207,042 |
| | $ | 347 |
| | $ | 207,389 |
|
| Selling expenses | | $ | 154,539 |
| | $ | (1,148 | ) | | $ | 153,391 |
|
| General and administrative expenses | | $ | 47,863 |
| | $ | 1,566 |
| | $ | 49,429 |
|
| Operating expenses | | $ | 205,918 |
| | $ | 418 |
| | $ | 206,336 |
|
| Income from operations | | $ | 1,124 |
| | $ | (71 | ) | | $ | 1,053 |
|
| Interest expense | | $ | (3,177 | ) | | $ | (6,580 | ) | | $ | (9,757 | ) |
| Other, net | | $ | 1,071 |
| | $ | 6,651 |
| | $ | 7,722 |
|
| Total other (expense) income | | $ | (2,092 | ) | | $ | 71 |
| | $ | (2,021 | ) |
|
| | | | | | | | | | | | |
| | | For the Year Ended June 30, 2017 |
| (In thousands) | | As Previously Reported | | ASU 2017-07 Adjustments | | As Adjusted |
| Cost of goods sold | | $ | 354,622 |
| | $ | 27 |
| | $ | 354,649 |
|
| Gross profit | | $ | 186,878 |
| | $ | (27 | ) | | $ | 186,851 |
|
| Selling expenses | | $ | 133,329 |
| | $ | 205 |
| | $ | 133,534 |
|
| General and administrative expenses | | $ | 42,933 |
| | $ | 12 |
| | $ | 42,945 |
|
| Operating expenses | | $ | 147,700 |
| | $ | 217 |
| | $ | 147,917 |
|
| Income from operations | | $ | 39,178 |
| | $ | (244 | ) | | $ | 38,934 |
|
| Interest expense | | $ | (2,185 | ) | | $ | (6,416 | ) | | $ | (8,601 | ) |
| Other, net | | $ | (1,201 | ) | | $ | 6,660 |
| | $ | 5,459 |
|
| Total other (expense) income | | $ | (1,812 | ) | | $ | 244 |
| | $ | (1,568 | ) |
New Accounting Pronouncements
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance in ASU 2018-15 is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods within those fiscal years, and is effective for the Company beginning July 1, 2020. Early adoption is permitted, including adoption in any interim period. The Company is currently evaluating the impact ASU 2018-15 will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”). ASU 2018-14 modifies disclosure of other accounting and reporting requirements related to single-employer defined benefit pension or other postretirement benefit plans. The guidance in ASU 2018-14 is effective for public business entities for annual periods beginning after December 15, 2020, and is effective for the Company beginning July 1, 2021. Early adoption is permitted. The Company is currently evaluating the impact ASU 2018-14 will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 improves the effectiveness of fair value measurement disclosures and modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. The guidance in ASU 2018-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years, and is effective for the Company beginning July 1, 2020. Early adoption is permitted. The Company is currently evaluating the impact ASU 2018-13 will have on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act and requires certain disclosures about stranded tax effects. The guidance in ASU 2018-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years, and is effective for the Company beginning July 1, 2019 and should be applied either in the period of adoption or retrospectively. Early adoption is permitted. The Company will adopt ASU 2018-02 beginning July 1, 2019. The adoption of ASU 2018-02 will not have a material effect on the results of operations, financial position or cash flows of the Company.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The amendments in ASU 2017-04 address concerns regarding the cost and complexity of the two-step goodwill impairment test, and remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. The guidance in ASU 2017-04 is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and is effective for the Company beginning July 1, 2020. Adoption of ASU 2017-04 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which introduces a new lessee model that brings substantially all leases onto the balance sheet. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make lease payments and a related right-of-use asset. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” which provide additional guidance to consider when implementing ASU 2016-02. For public business entities, ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early application is permitted. The Company adopted the standard effective July 1, 2019, utilizing the modified retrospective transition method. The Company has completed its compilation of all leases and has preliminary concluded that the impact of the adoption of ASU 2016-02 is expected to be a recognition of right-of-use assets and lease liabilities of between $14 million and $19 million on its Consolidated Balance Sheets. The adoption is not expected to have a material impact on its Consolidated Statements of Operations or on other consolidated financial statements. The Company elected certain practical expedients provided in the guidance which allows it not to reassess whether
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
existing contracts are or contain leases, to not reassess the lease classification of any existing leases, to not reassess initial direct costs for any existing leases, and to not separate lease components for certain asset classes. The Company also made an accounting policy to exclude leases with a term of 12 months or less.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 22. Commitments3. Acquisitions
West Coast Coffee Company, Inc.
On February 7, 2017, the Company acquired substantially all of the assets and Contingencies
Leases
On July 17, 2015,certain specified liabilities of West Coast Coffee, a coffee roaster and distributor with a focus on the convenience store, grocery and foodservice channels. As part of the transaction, the Company entered into a three-year lease on West Coast Coffee’s existing 20,400 square foot facility in Hillsboro, Oregon, which expires January 31, 2020, and assumed leases on six branch warehouses consisting of an aggregate of 24,150 square feet in Oregon, California and Nevada, expiring on various dates through November 2020. The Company acquired West Coast Coffee for aggregate purchase consideration of $15.5 million, which included $14.7 million in cash paid at closing including working capital adjustments of $1.2 million, post-closing final working capital adjustments of $0.2 million, and up to $1.0 million in contingent consideration to be paid as earnout if certain sales levels are achieved in the Lease Agreement, with lessor pursuanttwenty-four months following the closing. This contingent earnout liability was estimated to whichhave a fair value of $1.0 million and was recorded in other current liabilities on the Company’s consolidated balance sheet at June 30, 2019 and June 30, 2018. Total earnout amount of $1.0 million was paid in July 2019.
In fiscal 2017, the Company
leased the New Facility (see Note 4). The Company recorded an assetincurred $0.3 million in transaction costs related to the New Facility lease obligationWest Coast Coffee acquisition, consisting primarily of legal and accounting expenses, which are included in property, plantgeneral and equipmentadministrative expenses in the Company's consolidated statements of $28.1 million atoperations for the fiscal year ended June 30, 2016 with an offsetting liability2017. No transaction costs were incurred in fiscal 2019 and 2018 relating to the West Coast Coffee acquisition. The financial effect of $28.1 millionthis acquisition was not material to the Company’s consolidated financial statements. The Company has not presented pro forma results of operations for the lease obligation includedacquisition because it is not significant to the Company's consolidated results of operations.
The acquisition was accounted for as a business combination. The Company allocated $7.9 million of consideration transferred to tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the $7.6 million remaining unallocated amount recorded as goodwill. The purchase price allocation is final.
Boyd Coffee Company
On October 2, 2017 (“Closing Date”), the Company acquired substantially all of the assets and certain specified liabilities of Boyd Coffee, a coffee roaster and distributor with a focus on restaurants, hotels, and convenience stores on the West Coast of the United States. The acquired business of Boyd Coffee (the “Boyd Business”) is expected to add to the Company’s product portfolio, improve the Company's growth potential, deepen the Company’s distribution footprint and increase the Company's capacity utilization at its production facilities.
At closing, as consideration for the purchase, the Company paid the Seller $38.9 million in "Other long-term liabilities"cash from borrowings under its senior secured revolving credit facility, and issued to Boyd Coffee 14,700 shares of the Company’s Series A Preferred Stock Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share (“Series A Preferred Stock”), with a fair value of $11.8 million as of the Closing Date. Additionally, the Company held back $3.2 million in cash (“Holdback Cash Amount”) and 6,300 shares of Series A Preferred Stock (“Holdback Stock”) with a fair value of $4.8 million as of the Closing Date, for the satisfaction of any post-closing net working capital adjustment and to secure the Seller’s (and the other seller parties’) indemnification obligations under the purchase agreement.
In addition to the Holdback Cash, as part of the consideration for the purchase, at closing the Company held back $1.1 million in cash (the “Multiemployer Plan Holdback”) to pay, on behalf of the Seller, any assessment of withdrawal liability made against the Seller following the Closing Date in respect of the Seller’s multiemployer pension plan, which amount was recorded on the Company's consolidated balance sheet in "Other long-term liabilities" at June 30, 2016. There were no such amounts2018. On January 8, 2019, the Seller notified the Company of the assessment of $0.5 million in withdrawal liability against the Seller, which the Company timely paid from the Multiemployer Plan Holdback during the twelve months ended June 30, 2019. The Company has applied the remaining amount of the Multiemployer Plan Holdback of $0.5 million towards satisfaction of the Seller's post-closing net working capital deficiency under the Asset Purchase Agreement as of March 31, 2019 as described below.
The acquisition was accounted for as a business combination. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
date, with the remaining unallocated amount recorded
as goodwill. The fair value of consideration transferred reflected the Company’s best estimate of the post-closing net working capital adjustment of $8.1 million due to the Company at June 30,
2015 (see Note 19).2018 when the purchase price allocation was finalized. On January 23, 2019, PricewaterhouseCoopers LLP (“PwC”), as the “Independent Expert” designated under the Asset Purchase Agreement to resolve working capital disputes, issued its determination letter with respect to adjustments to working capital. The post-closing net working capital adjustment, as determined by the Independent Expert, was $6.3 million due to the Company. During the year ended June 15, 2016,30, 2019 the Company exercised its option to purchasesatisfied the partially constructed New Facility$6.3 million amount by applying the remaining amount of the Multiemployer Plan Holdback of $0.5 million, retaining all of the Holdback Cash Amount of $3.2 million and canceling 4,630 shares of Holdback Stock with a fair value of $2.3 million based on the stated value and deemed conversion price under the LeaseAsset Purchase Agreement. The termsCompany has retained the remaining 1,670 shares of the Company's capital leases varyHoldback Stock pending satisfaction of certain indemnification claims against the Seller following which the remaining Holdback Stock, if any, will be released to the Seller.
The following table summarizes the final allocation of consideration transferred as of the acquisition date:
|
| | | | | |
| (In thousands) | Fair Value | | Estimated Useful Life (years) |
| | | | |
| Cash paid | $ | 38,871 |
| | |
| Holdback Cash Amount | 3,150 |
| | |
| Multiemployer Plan Holdback | 1,056 |
| | |
| Fair value of Series A Preferred Stock (14,700 shares)(1) | 11,756 |
| | |
| Fair value of Holdback Stock (6,300 shares)(1) | 4,825 |
| | |
| Estimated post-closing net working capital adjustment | (8,059 | ) | | |
| Total consideration | $ | 51,599 |
| | |
| | | | |
| Accounts receivable | $ | 7,503 |
| | |
| Inventory | 9,415 |
| | |
| Prepaid expense and other assets | 1,951 |
| | |
| Property, plant and equipment | 4,936 |
| | |
| Goodwill | 25,395 |
| | |
| Intangible assets: | | | |
| Customer relationships | 16,000 |
| | 10 |
| Trade name/trademark—indefinite-lived | 3,100 |
| | |
| Accounts payable | (15,080 | ) | | |
| Other liabilities | (1,621 | ) | | |
| Total consideration | $ | 51,599 |
| | |
______________
(1) Fair value of Series A Preferred Stock and Holdback Stock as of the Closing Date, estimated as the sum of (a) the present value of the dividends payable thereon and (b) the stated value of the Series A Preferred Stock or Holdback Stock, as the case may be, adjusted for both the conversion premium and the discount for lack of marketability arising from 12 monthsconversion restrictions.
In connection with this acquisition, the Company recorded goodwill of $25.4 million, which is deductible for tax purposes. The Company also recorded $16.0 million in finite-lived intangible assets that included customer relationships and $3.1 million in indefinite-lived intangible assets that included a trade name/trademark. The amortization period for the finite-lived intangible
Farmer Bros. Co.
Notes to 84 months with varying expiration dates through 2021.Consolidated Financial Statements (continued)
assets is 10.0 years.
The determination of the fair value of intangible assets acquired was primarily based on significant inputs not observable in an active market and thus represent Level 3 fair value measurements as defined under GAAP.
The fair value assigned to the customer relationships was determined based on management's estimate of the retention rate utilizing certain benchmarks. Revenue and earnings projections were also significant inputs into estimating the value of customer relationships.
The fair value assigned to the trade name/trademark was determined utilizing a multi-period excess earnings approach. Under the multi-period excess earnings approach, the fair value of the intangible asset is estimated to be the present value of future earnings attributable to the asset and this method utilizes revenue and cost projections including an assumed contributory asset charge.
The following table presents the net sales and income before taxes from the Boyd Business operations that are included in the Company’s consolidated statements of operations for the fiscal year ended June 30, 2019 and 2018:
|
| | | | |
| (In thousands) | | For the Year Ended June 30, |
| | | 2018 |
| Net sales | | $ | 67,385 |
|
| Income before taxes | | $ | 1,572 |
|
The Company is also obligated under operating leases for branch warehouses, distribution centers and its production facility in Portland, Oregon. Some operating leases have renewal options that allowconsiders the Company, as lessee,acquisition to extendbe material to the leases. The Company has one operating lease with a term greater than five years that expires in 2018Company’s consolidated financial statements and has a ten year renewal option, and operating leasesprovided certain pro forma disclosures pursuant to ASC 805, “Business Combinations.”
The following table sets forth certain unaudited pro forma financial results for computer hardware with terms that do not exceed three years. Rent expensethe Company for the fiscal years ended June 30, 2016, 20152019, 2018 and 20142017, as if the acquisition of the Boyd Business was $4.5 million, $3.8 million and $3.7 million, respectively.
Contractual obligations for future fiscal years are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Contractual Obligations |
| (In thousands) | | Capital Lease Obligations | | Operating Lease Obligations | | New Facility Purchase Option Exercise Price(1) | | Pension Plan Obligations | | Postretirement Benefits Other Than Pension Plans | | Revolving Credit Facility | | Purchase Commitments (2) |
| Year Ended June 30, | | | | | | | | | | | | | | |
| 2017 | | $ | 1,443 |
| | $ | 4,093 |
| | $ | 58,779 |
| | $ | 8,075 |
| | $ | 1,080 |
| | $ | 109 |
| | $ | 72,217 |
|
| 2018 | | $ | 880 |
| | $ | 3,366 |
| | $ | — |
| | $ | 8,304 |
| | $ | 1,102 |
| | $ | — |
| | $ | — |
|
| 2019 | | $ | 125 |
| | $ | 2,561 |
| | $ | — |
| | $ | 8,554 |
| | $ | 1,143 |
| | $ | — |
| | $ | — |
|
| 2020 | | $ | 52 |
| | $ | 1,279 |
| | $ | — |
| | $ | 8,844 |
| | $ | 1,176 |
| | $ | — |
| | $ | — |
|
| 2021 | | $ | 4 |
| | $ | 441 |
| | $ | — |
| | $ | 9,074 |
| | $ | 1,210 |
| | $ | — |
| | $ | — |
|
| Thereafter | | $ | — |
| | $ | 61 |
| | $ | — |
| | $ | 47,099 |
| | $ | 6,246 |
| | $ | — |
| | $ | — |
|
| | | | | $ | 11,801 |
| | $ | 58,779 |
| | $ | 89,950 |
| | $ | 11,957 |
| | $ | 109 |
| | $ | 72,217 |
|
| Total minimum lease payments | | $ | 2,504 |
| | | | | | | | | | | | |
Less: imputed interest (0.82% to 10.7%) | | $ | (145 | ) | | | | | | | | | | | | |
| Present value of future minimum lease payments | | $ | 2,359 |
| | | | | | | | | | | | |
| Less: current portion | | $ | 1,323 |
| | | | | | | | | | | | |
| Long-term capital lease obligations | | $ | 1,036 |
| | | | | | | | | | | | |
___________
(1) Includes estimated purchase option exercise price pursuant to the Lease Agreement for the partially constructed New Facility. The table above reflects purchase option exercise price basedconsummated on the budget and after completion of the construction, payable in fiscal year ending June 30, 2017 (see Note 4). The actual purchase option exercise price will be based on actual construction-related costs for the partially constructed facilitysame terms as of the purchase option closing date.first day of the applicable fiscal year. (2) Purchase commitments include commitments under coffee purchase contracts |
| | | | | | | | | |
| | | For the Year Ended June 30, |
| (In thousands) | | | 2018 | | 2017 |
| Net sales | | | $ | 628,526 |
| | $ | 636,969 |
|
| (Loss) income before taxes | | | $ | (642 | ) | | $ | 36,969 |
|
The unaudited pro forma financial results for which all delivery terms have been finalized but the related coffee has not been received as of June 30, 2016. Amounts shown in the table above: (a) include all coffee purchase contracts that the Company considers to be from normal purchases;are based on estimates and (b) doassumptions, which the Company believes are reasonable. These results are not include amounts related to derivative instruments that are recorded at fair value onnecessarily indicative of the Company’s consolidated balance sheets.statements of operations in future periods or the results that actually would have been realized had the Company acquired the Boyd Business during the periods presented.
At closing, the parties entered into a transition services agreement where the Seller agreed to provide certain accounting, marketing, human resources, information technology, sales and distribution and other administrative support during a transition period of up to 12 months. The Company also entered into a co-manufacturing agreement with the Seller for a transition period of up to 12 months as the Company transitions manufacturing into its production facilities. Amounts paid by the Company to the Seller for these services totaled $3.7 million and $25.4 million in the fiscal year ended June 30, 2019 and 2018, respectively.
The Company has incurred acquisition and integration costs related to the Boyd Business acquisition, consisting primarily of inventory mark downs, legal expenses, Boyd Coffee plant decommissioning and equipment relocation costs, and one-time payroll and benefit expenses, of $6.1 million and $7.6 million during the fiscal years ended June 30, 2019 and 2018, respectively, which are included in operating expenses in the Company's consolidated statements of operations.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 4. Restructuring Plans
Self-InsuranceCorporate Relocation Plan
At June 30, 2016 andOn February 5, 2015, the Company had posted a $7.4 millionannounced the Corporate Relocation Plan to close its Torrance, California facility and $7.0 million letter of credit, respectively,relocate its corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California to the Northlake facility. Approximately 350 positions were impacted as a security depositresult of the Torrance Facility closure. The Company’s decision resulted from a comprehensive review of alternatives designed to make the Company more competitive and better positioned to capitalize on growth opportunities.
During fiscal year ended June 30, 2019, the Company incurred $3.4 million in restructuring and other transition expenses associated with the Stateassessment by the Western Conference of California DepartmentTeamsters Pension Trust (the “WCT Pension Trust”) of Industrial Relations Self-Insurance Plans for participation in the alternative security program for California self-insurers for workers’ compensation liability. At June 30, 2016 and 2015,Company’s share of the Western Conference of Teamsters Pension Plan (the “WCTPP”) unfunded benefits due to the Company’s partial withdrawal from the WCTPP as a result of employment actions taken by the Company had posted a $4.3 million letter of credit as a security deposit for self-insuring workers’ compensation, general liability and auto insurance coverages outside of California.
Non-cancelable Purchase Orders
As of June 30,in 2016 the Company had committed to purchase green coffee inventory totaling $62.5 million under fixed-price contracts, equipment for the New Facility totaling $3.3 million and other inventory totaling $6.3 million under non-cancelable purchase orders.
Legal Proceedings
Council for Education and Research on Toxics (“CERT”) v. Brad Berry Company Ltd., et al., Superior Court of the State of California, County of Los Angeles
On August 31, 2012, CERT filed an amendment to a private enforcement action adding a number of companies as defendants, including CBI, which sell coffee in California. The suit alleges that the defendants have failed to issue clear and reasonable warnings in accordance with Proposition 65 that the coffee they produce, distribute and sell contains acrylamide. This lawsuit was filed in Los Angeles Superior Court (the “Court”). CERT has demanded that the alleged violators remove acrylamide from their coffee or provide Proposition 65 warnings on their products and pay $2,500 per day for each and every violation while they are in violation of Proposition 65.
Acrylamide is produced naturally in connection with the heatingCorporate Relocation Plan, of many foods, especially starchy foods,which the Company has paid $1.9 million and is believed to be caused byhas outstanding contractual obligations of $1.5 million as of June 30, 2019.
Since the Maillard reaction, though it has also been found in unheated foods such as olives. With respect to coffee, acrylamide is produced when coffee beans are heated during the roasting process-it is the roasting itself that produces the acrylamide. While there has been a significant amount of research concerning proposals for treatments and other processes aimed at reducing acrylamide content of different types of foods, to our knowledge there is currently no known strategy for reducing acrylamide in coffee without negatively impacting the sensorial propertiesadoption of the product.Corporate Relocation Plan through June 30, 2019, the Company has recognized a total of $35.2 million in aggregate costs including $17.4 million in employee retention and separation benefits, $3.4 million in pension withdrawal liability, $7.0 million in facility-related costs related to the temporary office space, costs associated with the move of the Company’s headquarters, relocation of the Company’s Torrance operations and certain distribution operations and $7.4 million in other related costs. The Company also recognized from inception through June 30, 2019 non-cash depreciation expense of $2.3 million associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and $1.4 million in non-cash rent expense recognized in the sale-leaseback of the Torrance Facility.
DSD Restructuring Plan
On February 21, 2017, the Company announced the DSD Restructuring Plan to reorganize its DSD operations in an effort to realign functions into a channel-based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results. The strategic decision to undertake the DSD Restructuring Plan resulted from an ongoing operational review of various initiatives within the DSD selling organization. The Company had revised its estimated time of completion of the DSD Restructuring Plan from the end of calendar 2018 to the end of fiscal 2019.
The Company has joined a Joint Defense Grouprecognized approximately $4.5 million of pre-tax restructuring charges by the end of fiscal 2019 consisting of approximately $2.3 million in employee-related costs and alongcontractual termination payments, including severance, prorated bonuses for bonus eligible employees and outplacement services, and $2.2 million in other related costs, including legal, recruiting, consulting, other professional services, and travel.
The following table sets forth the activity in liabilities associated with the other co-defendants, has answeredDSD Restructuring Plan from the complaint, denying, generally,time of adoption through the allegationsfiscal year ended June 30, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (In thousands) | Balances as of June 30, 2017 | | Additions | | Payments | | Non-Cash Settled | | Adjustments | | Balances as of
June 30, 2019 |
| Employee-related costs | $ | — |
| | $ | 2,634 |
| | $ | 2,605 |
| | $ | — |
| | $ | — |
| | $ | 29 |
|
| Other | — |
| | 1,949 |
| | 1,918 |
| | — |
| | (31 | ) | | — |
|
| Total | $ | — |
| | $ | 4,583 |
| | $ | 4,523 |
| | $ | — |
| | $ | (31 | ) | | $ | 29 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table sets forth the expenses associated with the DSD Restructuring Plan for the fiscal year ended June 30, 2019, 2018 and 2017:
|
| | | | | | | | | | | |
| | Year Ended June 30, |
| (In thousands) | 2019 | | 2018 | | 2017 |
| Employee-related costs | $ | 1,487 |
| | $ | 612 |
| | $ | 506 |
|
| Other | 284 |
| | 429 |
| | 1,205 |
|
| Total | $ | 1,771 |
| | $ | 1,041 |
| | $ | 1,711 |
|
Note 5. Sales of Assets
Sale of Spice Assets
In order to focus on its core products, on December 8, 2015, the Company completed the sale of the complaint, including the claimed violation of Proposition 65 and further denying CERT’s rightSpice Assets to any relief or damages, including the right to require a warning on products.Harris. The Joint Defense Group contends that based on proper scientific analysis and proper applicationsale included substantially all of the standards set forthCompany’s personal property used exclusively in Proposition 65, exposuresconnection with the manufacture, processing and distribution of raw, processed and blended spices and certain other culinary products (collectively, the “Spice Assets”), including certain equipment; trademarks, trade names and other intellectual property assets; contract rights under sales and purchase orders and certain other agreements; and a list of certain customers, other than the Company’s DSD customers, and assumed certain liabilities relating to acrylamidethe Spice Assets. The Company received $6.0 million in cash at closing, and was eligible to receive an earnout amount of up to $5.0 million over a three year period based upon a percentage of certain institutional spice sales by Harris following the closing. Gain from the coffee products pose no significant riskearnout on the sale was recognized when earned and when realization was assured beyond a reasonable doubt. The Company recognized $0.6 million, $0.8 million and $1.0 million in earnout during the fiscal years ended June 30, 2019, 2018 and 2017, respectively, which is included in “Net gains from sale of cancer and, thus, these exposures are exempt from Proposition 65’s warning requirement.
To date,Spice Assets” in the pleadings stageCompany's consolidated statements of operations. The sale of the case has been completed.Spice Assets did not represent a strategic shift for the Company and did not have a material impact on the Company's results of operations because the Company continues to sell a complete portfolio of spice and other culinary products purchased from Harris under a supply agreement to its DSD customers.
Sale of Torrance Facility
On July 15, 2016, the Company completed the sale of the Torrance Facility, consisting of approximately 665,000 square feet of buildings located on approximately 20.3 acres of land, for an aggregate cash sale price of $43.0 million, which sale price was subject to customary adjustments for closing costs and documentary transfer taxes. Cash proceeds from the sale of the Torrance Facility were $42.5 million.
Following the closing of the sale, the Company leased back the Torrance Facility on a triple net basis through October 31, 2016 at zero base rent, and exercised two one-month extensions at a base rent of $100,000 per month. In accordance with ASC 840, “Leases,” due to the Company’s continuing involvement with the property, the Company accounted for the transaction as a financing transaction, deferred the gain on sale of the Torrance Facility and recorded the net sale proceeds of $42.5 million and accrued non-cash interest expense on the financing transaction in “Sale-leaseback financing obligation” on the Company's consolidated balance sheet at September 30, 2016. The Court has phased trial so thatCompany vacated the “no significant risk level” defense,Torrance Facility in December 2016 and concluded the First Amendment defense,leaseback transaction. As a result, at December 31, 2016, the financing transaction qualified for sales recognition under ASC 840. Accordingly, in the fiscal year ended June 30, 2017, the Company recognized the net gain from sale of the Torrance Facility in the amount of $37.4 million, including non-cash interest expense of $0.7 million and non-cash rent expense of $1.4 million, representing the rent for the zero base rent period previously recorded in “Other current liabilities” and removed the amounts recorded in “Assets held for sale” and the preemption defense will be tried first. Fact discovery and expert discovery“Sale-leaseback financing obligation” on these “Phase 1” defenses have been completed, and the parties filed trial briefs. Trial commenced on September 8, 2014, and testimony completed on November 4, 2014, for the three Phase 1 defenses. Following two continuances, the court heard on April 9, 2015 final arguments on the Phase 1 issues. On July 25, 2015, the Court issued its Proposed Statement of Decision with respect to Phase 1 defenses against the defendants, which was confirmed, on September 2, 2015 in the Final Statement of Decision. The Court has stated that all defendants would be included in “Phase 2,” though this remains unresolved, including the extent of the involvement or participation in discovery. Following permission from the Court, on October 14, 2015 the Joint Defense Group filed a writ petition for an interlocutory appeal. In late December 2015, plaintiff’s counsel served letters proposing a new plan to file the anticipated motion for summary adjudication and a new set of discovery on all defendants. On January 14, 2016, the Court of Appeals denied the Joint Defense Group’s writ petition thereby denying the interlocutory appeal. On February 16, 2016, CERT filed a motion for summary adjudication arguing that based upon facts that had been stipulated by defendants, CERT had proven its prima facie case and all that remains is a determination of whether any affirmative defenses are available to defendants. On March 16, 2016, the Court reinstated the stay on discovery for all defendant parties except for the four largest defendants, so the Company is not currently obligated to participate in discovery. Following a hearing on April 20, 2016, the Court grantedconsolidated balance sheet.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
CERT’s motion for summary adjudication on its prima facie case. Plaintiff filed its motion for summary adjudication of affirmatives defenses on May 16, 2016 and the defendants’ opposition brief was filed on July 22, 2016. Certain discovery responses were scheduled to be due by September 9, 2016. At an August 19, 2016 hearing on Plaintiff’s motion for summary adjudication and defendants’ opposition with respect to the affirmative defenses, the Court denied Plaintiff’s motion, thus the Joint Defense Group will continue to be able to present the affirmative defenses at trial. At this time, the Company is not able to predict the probability of the outcome or estimate of loss, if any, related to this matter.
Steve Hernandez vs. Farmer Bros. Co., Superior Court of State of California, County of Los Angeles
On July 24, 2015, former Company employee Hernandez filed a putative class action complaint for damages alleging a single cause of action for unfair competition under the California Business & Professions Code. The claim purports to seek disgorgement of profits for alleged violations of various provisions of the California Labor Code relating to: failing to pay overtime, failing to provide meal breaks, failing to pay minimum wage, failing to pay wages timely during employment and upon termination, failing to provide accurate and complete wage statements, and failing to reimburse business-related expenses. Hernandez’s complaint seeks restitution in an unspecified amount and injunctive relief, in addition to attorneys’ fees and expenses. Hernandez alleges that the putative class is all “current and former hourly-paid or non-exempt individuals” for the four (4) years preceding the filing of the complaint through final judgment, and Hernandez also purports to reserve the right to establish sub-classes as appropriate. On November 12, 2015, a separate putative class representative, Monica Zuno, filed claim under the same class action; the Court has related this case to the Hernandez case. On November 17, 2015, the unified case was assigned to a judge, and this judge ordered the stay on discovery to remain intact until after a decision on the Company’s demurrer action. The plaintiff filed an Opposition to the Demurrer and, in response, on January 5, 2016, the Company filed a reply to this Opposition to the Demurrer. On February 2, 2016, the Court held a hearing on the demurrer and found in the Company’s favor, sustaining the demurrer in its entirety without leave to amend as to the plaintiff Hernandez, and so dismissing Hernandez’s claims and the related putative class. Claims on behalf of the plaintiff Zuno remain at this time, pending the filing of an amended complaint on behalf of this remaining plaintiff and reduced putative class. The Company provided responses to discovery following a lift by the Court of the stay on discovery. The Court has set a case management conference for October 18, 2016 to give Plaintiff’s counsel time to review the discovery documents the Company produced and determine whether Plaintiff intends to proceed with the case as a putative class action or on an individual basis only. At this time, we are not able to predict the probability of the outcome or estimate of loss, if any, related to this matter.
The Company is a party to various other pending legal and administrative proceedings. It is management’s opinion that the outcome of such proceedings will not have a material impact on the Company’s financial position, results of operations, or cash flows.
Note 23. Selected Quarterly Financial Data (Unaudited)
The following tables set forth certain unaudited quarterly information for each of the eight fiscal quarters in the two year period ended June 30, 2016. This quarterly information has been prepared on a consistent basis with the audited consolidated financial statements and, in the opinion of management, includes all adjustments which management believes are necessary for a fair presentation of the information for the periods presented.
The Company's quarterly operating results may fluctuate significantly as a result of a variety of factors, and operating results for any fiscal quarter are not necessarily indicative of results for a full fiscal year or future fiscal quarters.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| | | | | | | | | | | | | | | | |
| | | September 30,
2015 | | December 31,
2015 | | March 31,
2016 | | June 30,
2016 |
| (In thousands, except per share data) | | | | | | | | |
| Net sales | | $ | 133,445 |
| | $ | 142,307 |
| | $ | 134,468 |
| | $ | 134,162 |
|
| Gross profit | | $ | 50,579 |
| | $ | 52,908 |
| | $ | 52,560 |
| | $ | 52,428 |
|
| (Loss) income from operations | | $ | (563 | ) | | $ | 5,361 |
| | $ | 306 |
| | $ | 3,075 |
|
| Net (loss) income | | $ | (1,074 | ) | | $ | 5,561 |
| | $ | 1,192 |
| | $ | 84,239 |
|
| Net (loss) income) per common share—basic | | $ | (0.07 | ) | | $ | 0.34 |
| | $ | 0.07 |
| | $ | 5.09 |
|
| Net (loss) income per common share—diluted | | $ | (0.07 | ) | | $ | 0.34 |
| | $ | 0.07 |
| | $ | 5.05 |
|
|
| | | | | | | | | | | | | | | | |
| | | September 30,
2014 | | December 31,
2014 | | March 31,
2015 | | June 30,
2015 |
| (In thousands, except per share data) | | | | | | | | |
| Net sales | | $ | 135,984 |
| | $ | 144,809 |
| | $ | 132,507 |
| | $ | 132,582 |
|
| Gross profit | | $ | 48,121 |
| | $ | 53,142 |
| | $ | 46,569 |
| | $ | 49,204 |
|
| Income (loss) from operations | | $ | 2,601 |
| | $ | 3,505 |
| | $ | (1,405 | ) | | $ | (1,417 | ) |
| Net income (loss) | | $ | 2,515 |
| | $ | 2,896 |
| | $ | (2,572 | ) | | $ | (2,187 | ) |
| Net income (loss) per common share—basic | | $ | 0.16 |
| | $ | 0.18 |
| | $ | (0.16 | ) | | $ | (0.13 | ) |
| Net income (loss) per common share—diluted | | $ | 0.16 |
| | $ | 0.18 |
| | $ | (0.16 | ) | | $ | (0.13 | ) |
In the fourth quarter of fiscal 2016, the Company concluded that it is more likely than not that the Company will generate future earnings sufficient to realize the majority of the Company’s deferred tax assets as of June 30, 2016. Accordingly, the Company recorded a reduction in its valuation allowance in the fourth quarter of fiscal 2016 in the amount of $83.2 million. See Note 20.
Note 24. Subsequent Events6. Derivative Instruments
CompletionDerivative Instruments Held
Coffee-Related Derivative Instruments
The Company is exposed to commodity price risk associated with its PTF green coffee purchase contracts, which are described further in Note 2. The Company utilizes forward and option contracts to manage exposure to the variability in expected future cash flows from forecasted purchases of green coffee attributable to commodity price risk. Certain of these coffee-related derivative instruments utilized for risk management purposes have been designated as cash flow hedges, while other coffee-related derivative instruments have not been designated as cash flow hedges or do not qualify for hedge accounting despite hedging the Company's future cash flows on an economic basis. The following table summarizes the notional volumes for the coffee-related derivative instruments held by the Company at June 30, 2019 and 2018:
|
| | | | | | |
| | | As of June 30, |
| (In thousands) | | 2019 | | 2018 |
| Derivative instruments designated as cash flow hedges: | | | | |
| Long coffee pounds | | 42,113 |
| | 40,913 |
|
| Derivative instruments not designated as cash flow hedges: | | | | |
| Long coffee pounds | | 6,070 |
| | 2,546 |
|
| Total | | 48,183 |
| | 43,459 |
|
Coffee-related derivative instruments designated as cash flow hedges outstanding as of June 30, 2019 will expire within 18 months. At June 30, 2019 and 2018 approximately 87% and 94%, respectively, of the Sale of AssetsCompany's outstanding coffee-related derivative instruments were designated as cash flow hedges.
On July 15, 2016,Interest Rate Swap Derivative Instruments
Pursuant to an International Swap Dealers Association, Inc. Master Agreement (“ISDA”) effective March 20, 2019, the Company completed the sale of certain property, including the Company’s former headquarters, located at 20333 S. Normandie Avenue, Torrance, CA 90502 (the "Torrance Property"), consisting of approximately 665,000 square feet of buildings located on approximately 20.33 acres of land, for an aggregate cash sale price of $43.0 million. The Company received net proceeds of $42.5 million from the sale of the Torrance Property, after customary adjustments for closing costs and documentary transfer taxes.
Asset Purchase Agreement
On September 9, 2016, a newly-formed, wholly-owned subsidiary of the Company, as the Buyer, and China Mist Brands, Inc., dba China Mist Tea Company ("China Mist"), as the Seller,March 27, 2019, entered into a definitive agreementswap transaction utilizing a notional amount of $80.0 million, with an effective date of April 11, 2019 and a maturity date of October 11, 2023 (the “Rate Swap”). The Rate Swap is intended to purchasemanage the Company’s interest rate risk on its floating-rate indebtedness under the Company’s revolving credit facility. Under the terms of the Rate Swap, the Company receives 1-month LIBOR, subject to a 0% floor, and makes payments based on a fixed rate of 2.1975%. The Company’s obligations under the ISDA are secured by the collateral which secures the loans under the revolving credit facility on a pari passu and pro rata basis with the principal of such loans. The Company has designated the Rate Swap derivative instruments as a cash flow hedge.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Effect of Derivative Instruments on the Financial Statements
Balance Sheets
Fair values of derivative instruments on the Company's consolidated balance sheets: |
| | | | | | | | | | | | | | | | |
| | | Derivative Instruments Designated as Cash Flow Hedges | | Derivative Instruments Not Designated as Accounting Hedges |
| | | As of June 30, | | As of June 30, |
| (In thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| Financial Statement Location: | | | | | | | | |
| Short-term derivative assets: | | | | | | | | |
| Coffee-related derivative instruments(1) | | $ | 1,254 |
| | $ | — |
| | $ | 611 |
| | $ | — |
|
| Long-term derivative assets: | | | | | | | | |
| Coffee-related derivative instruments(2) | | $ | 671 |
| | $ | — |
| | $ | 3 |
| | $ | — |
|
| Short-term derivative liabilities: | | | | | | | | |
| Coffee-related derivative instruments(3) | | $ | 1,114 |
| | $ | 3,081 |
| | $ | 114 |
| | $ | 219 |
|
| Interest rate swap derivative instruments(3) | | $ | 246 |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Long-term derivative liabilities: | | | | | | | | |
| Coffee-related derivative instruments(4) | | $ | 13 |
| | $ | 386 |
| | $ | — |
| | $ | — |
|
| Interest rate swap derivative instruments(4) | | $ | 1,599 |
| | $ | — |
| | $ | — |
| | $ | — |
|
________________
(1) Included in “Short-term derivative assets” on the Company's consolidated balance sheets.
(2) Included in “Long-term derivative assets” on the Company's consolidated balance sheets.
(3) Included in “Short-term liabilities” on the Company's consolidated balance sheets.
(4) Included in “Other long-term liabilities” on the Company's consolidated balance sheets.
Statements of Operations
The following table presents pretax net gains and losses for the Company's derivative instruments designated as cash flow hedges, as recognized in “AOCI,” “Cost of goods sold” and “Other, net”.
|
| | | | | | | | | | | | | | | |
| | | Year Ended June 30, | | Financial Statement Classification |
| (In thousands) | | 2019 | | 2018 | | 2017 | | |
| Net losses recognized in AOCI - Interest rate swap | | $ | (1,791 | ) | | $ | — |
| | $ | — |
| | | AOCI |
| Net gains recognized from AOCI to earnings - Interest rate swap | | $ | 46 |
| | $ | — |
| | $ | — |
| | | Interest Expense |
| Net losses recognized in AOCI - Coffee-related | | $ | (7,407 | ) | | $ | (8,420 | ) | | $ | (4,746 | ) | | | AOCI |
| Net losses recognized in earnings - Coffee-related | | $ | (9,242 | ) | | $ | (1,179 | ) | | $ | (835 | ) | | | Costs of goods sold |
| Net gains (losses) recognized in earnings (ineffective portion) | | $ | — |
| | $ | 48 |
| | $ | (456 | ) | | | Other, net |
For the fiscal years ended June 30, 2019, 2018 and 2017, there were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness or as a result of reclassifications to earnings following the discontinuance of any cash flow hedges.
Net losses (gains) on derivative instruments in the Company's consolidated statements of cash flows also includes net losses (gains) on coffee-related derivative instruments designated as cash flow hedges reclassified to cost of goods sold from AOCI in the fiscal years ended June 30, 2019, 2018 and 2017. Gains and losses on derivative instruments not designated as accounting hedges are included in “Other, net” in the Company's consolidated statements of operations and in “Net losses (gains) on derivative instruments and investments” in the Company's consolidated statements of cash flows.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Net gains and losses recorded in “Other, net” are as follows: |
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Net losses on coffee-related derivative instruments | | $ | (2,252 | ) | | $ | (469 | ) | | $ | (1,812 | ) |
| Net gains on investments | | — |
| | 7 |
| | 286 |
|
| Net losses on derivative instruments and investments(1) | | (2,252 | ) | | (462 | ) | | (1,526 | ) |
| Non-operating pension and other postretirement benefit plans cost(2) | | 6,315 |
| | 6,651 |
| | 6,660 |
|
| Other gains, net | | 103 |
| | 1,533 |
| | 325 |
|
| Other, net | | $ | 4,166 |
| | $ | 7,722 |
| | $ | 5,459 |
|
___________
(1) Excludes net losses and net gains on coffee-related derivative instruments designated as cash flow hedges recorded in cost of goods sold in the fiscal years ended June 30, 2019, 2018 and 2017.
(2) Presented in accordance with implementation of ASU 2017-07.
Offsetting of Derivative Assets and Liabilities
The Company has agreements in place that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, under certain coffee derivative agreements, the Company maintains accounts with its counterparties to facilitate financial derivative transactions in support of its risk management activities.
The following table presents the Company’s net exposure from its offsetting derivative asset and liability positions, as well as cash collateral on deposit with its counterparty as of the reporting dates indicated: |
| | | | | | | | | | | | | | | | | | |
| (In thousands) | | | | Gross Amount Reported on Balance Sheet | | Netting Adjustments | | Cash Collateral Posted | | Net Exposure |
| June 30, 2019 | | Derivative Assets | | $ | 2,539 |
| | $ | (698 | ) | | $ | — |
| | $ | 1,841 |
|
| | | Derivative Liabilities | | $ | 3,086 |
| | $ | (698 | ) | | $ | — |
| | $ | 2,388 |
|
| June 30, 2018 | | Derivative Assets | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| | | Derivative Liabilities | | $ | 3,686 |
| | $ | — |
| | $ | — |
| | $ | 3,686 |
|
Cash Flow Hedges
Changes in the fair value of the Company’s coffee-related derivative instruments designated as cash flow hedges are deferred in AOCI and subsequently reclassified into cost of goods sold in the same period or periods in which the hedged forecasted purchases affect earnings, or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. Based on recorded values at June 30, 2019, $7.4 million of net losses on coffee-related derivative instruments designated as cash flow hedge are expected to be reclassified into cost of goods sold within the next twelve months. These recorded values are based on market prices of the commodities as of June 30, 2019.
Changes in the fair value of the Company's interest rate swap derivative instruments designated as a cash flow hedge are deferred in AOCI and subsequently reclassified into interest expense in the period or periods when the hedged transaction affects earnings or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. As of June 30, 2019, $0.2 million of net losses on interest rate swap derivative instruments designated as a cash flow hedge are expected to be reclassified into interest expense within the next twelve months assuming no significant changes in the LIBOR rates. Due to LIBOR volatility, actual gains or losses realized within the next twelve months will likely differ from these values.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 7. Investments
In fiscal 2017, the Company liquidated substantially all of its trading securities to fund expenditures associated with its New Facility in Northlake, Texas. In fiscal 2018, the assetsCompany liquidated the remaining security and certain specified liabilities of China Mist, a provider of flavored iced teasclosed its preferred stock portfolio. The Company had no short-term investments at June 30, 2019 and iced green teas, for an aggregate purchase price of $11.32018 and $0.4 million with $10.8 million to be paid in cashshort-term investments at closingJune 30, 2017.
The following table shows gains and $0.5 million to be paid as earnout subject to certain conditions. The transaction is expected to close during the second quarter of fiscal 2017.losses on trading securities:
|
| | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | | 2018 | | 2017 |
| Total gains recognized from trading securities | | | $ | 7 |
| | $ | 286 |
|
| Less: Realized gains from sales of trading securities | | | 7 |
| | 1,909 |
|
| Unrealized (losses) gains from trading securities | | | $ | — |
| | $ | (1,623 | ) |
Note 8. Fair Value Measurements
Assets and liabilities measured and recorded at fair value on a recurring basis were as follows:
|
| | | | | | | | | | | | | | | | |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 |
| As of June 30, 2019 | | | | | | | | |
| Derivative instruments designated as cash flow hedges: | | | | | | | | |
| Coffee-related derivative assets(1) | | $ | 1,925 |
| | $ | — |
| | $ | 1,925 |
| | $ | — |
|
| Coffee-related derivative liabilities(1) | | $ | 1,127 |
| | $ | — |
| | $ | 1,127 |
| | $ | — |
|
| Interest rate swap derivative liabilities(2) | | $ | 1,845 |
| | $ | — |
| | $ | 1,845 |
| | $ | — |
|
| Derivative instruments not designated as accounting hedges: | | | |
|
| |
|
| |
|
| Coffee-related derivative assets(1) | | $ | 614 |
| | $ | — |
| | $ | 614 |
| | $ | — |
|
| Coffee-related derivative liabilities(1) | | $ | 114 |
| | $ | — |
| | $ | 114 |
| | $ | — |
|
| | | | | | | | | |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 |
| As of June 30, 2018 | | | | | | | | |
| Derivative instruments designated as cash flow hedges: | | | | | | | | |
| Coffee-related derivative liabilities(1) | | $ | 3,467 |
| | $ | — |
| | $ | 3,467 |
| | $ | — |
|
| Derivative instruments not designated as accounting hedges: | | | | | | | | |
| Coffee-related derivative liabilities(1) | | $ | 219 |
| | $ | — |
| | 219 |
| | $ | — |
|
____________________
|
| |
Item 9.(1) | Changes inThe Company's coffee-related derivative instruments are traded over-the-counter and, Disagreements with Accountants on Accounting and Financial Disclosuretherefore, classified as Level 2. |
| |
| (2) | The Company's interest rate swap derivative instrument are model-derived valuations with directly or indirectly observable significant inputs such as interest rate and, therefore, classified as Level 2. |
During the fiscal years ended June 30, 2019 and 2018, there were no transfers between the levels.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
None.Note 9. Accounts Receivable, Net |
| | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2019 | | 2018 |
| Trade receivables | | $ | 53,593 |
| | $ | 54,547 |
|
| Other receivables(1) | | 2,886 |
| | 4,446 |
|
| Allowance for doubtful accounts | | (1,324 | ) | | (495 | ) |
| Accounts receivable, net | | $ | 55,155 |
| | $ | 58,498 |
|
__________
(1)Includes vendor rebates and other non-trade receivables.
Allowance for doubtful accounts:
|
| | | |
| (In thousands) | |
| Balance at June 30, 2016 | $ | (714 | ) |
| Provision | (325 | ) |
| Write-off | 318 |
|
| Balance at June 30, 2017 | $ | (721 | ) |
| Provision | (909 | ) |
| Write-off | 1,530 |
|
| Recoveries | (395 | ) |
| Balance at June 30, 2018 | $ | (495 | ) |
| Provision | (1,761 | ) |
| Write-off | 533 |
|
| Recoveries | 399 |
|
| Balance at June 30, 2019 | $ | (1,324 | ) |
|
| | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2019 | | 2018 |
| Coffee | | | | |
| Processed | | $ | 25,769 |
| | $ | 26,882 |
|
| Unprocessed | | 33,259 |
| | 37,097 |
|
| Total | | $ | 59,028 |
| | $ | 63,979 |
|
| Tea and culinary products | | | | |
| Processed | | $ | 21,767 |
| | $ | 32,406 |
|
| Unprocessed | | 74 |
| | 1,161 |
|
| Total | | $ | 21,841 |
| | $ | 33,567 |
|
| Coffee brewing equipment parts | | $ | 7,041 |
| | $ | 6,885 |
|
| Total inventories | | $ | 87,910 |
| | $ | 104,431 |
|
In addition to product cost, inventory costs include expenditures such as direct labor and certain supply, freight, warehousing, overhead variances, PPVs and other expenses incurred in bringing the inventory to its existing condition and location. The “Unprocessed” inventory values as stated in the above table represent the value of raw materials and the “Processed” inventory values represent all other products consisting primarily of finished goods.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| |
Item 9A. | Controls and Procedures |
Note 11. Property, Plant and Equipment
|
| | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2019 | | 2018 |
| Buildings and facilities | | $ | 107,915 |
| | $ | 108,590 |
|
| Machinery and equipment | | 248,539 |
| | 231,581 |
|
| Equipment under capital leases | | 938 |
| | 1,408 |
|
| Capitalized software | | 27,666 |
| | 24,569 |
|
| Office furniture and equipment | | 14,035 |
| | 13,721 |
|
| | | $ | 399,093 |
| | $ | 379,869 |
|
| Accumulated depreciation | | (225,826 | ) | | (209,498 | ) |
| Land | | 16,191 |
| | 16,218 |
|
| Property, plant and equipment, net | | $ | 189,458 |
| | $ | 186,589 |
|
Capital leases consisted mainly of vehicle leases at June 30, 2019 and Procedures2018. Depreciation expense, which includes amortization expense recorded for assets under capital leases, was $31.1 million, $30.5 million, and $23.0 million, for the years ended June 30, 2019, 2018, and 2017, respectively.
Disclosure controlsThe Company capitalized coffee brewing equipment (included in machinery and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, are controls and other procedures that are designed to ensure that information required to be disclosed by usequipment) in the reports that we file or submit underamounts of $14.9 million and $12.1 million in fiscal 2019 and 2018, respectively. Depreciation expense related to the Exchange Act is recorded, processed, summarizedcapitalized coffee brewing equipment reported as cost of goods sold was $9.1 million, $8.6 million and reported, within$9.1 million in fiscal 2019, 2018 and 2017, respectively.
Maintenance and repairs to property, plant and equipment charged to expense for the time periods specifiedyears ended June 30, 2019, 2018, and 2017 were $10.3 million, $9.6 million and $8.0 million, respectively.
Northlake Facility Costs
In fiscal 2017, the Company completed the construction of, and exercised the purchase option to acquire, the Northlake facility. The Company commenced distribution activities at the Northlake facility during the second quarter of fiscal 2017 and initial production activities late in the rules and formsthird quarter of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclosefiscal 2017. The Company began roasting coffee in the reports that we file or submit underNorthlake facility in 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.fourth quarter of fiscal 2017. The Northlake facility received Safe Quality Food (SQF) certification in the third quarter of fiscal 2018.
As of June 30, 2016, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluationcompletion of the effectivenessNorthlake facility construction, the Company has incurred and paid an aggregate of our disclosure controls and procedures pursuant$60.8 million in construction costs, including $42.5 million to Rule 13a-15(e) promulgatedexercise the purchase option under the Exchange Act. Based upon that evaluation, our Chief Executive Officerlease agreement to acquire the land and Chief Financial Officer concluded that, asconstruction of June 30, 2016, our disclosure controlsthe Northlake facility.
Northlake Facility Expansion
In the third quarter of fiscal 2018, the Company commenced a project to expand its production lines (the “Expansion Project”) in the Northlake facility, including expanding capacity to support the transition of acquired business. The Expansion Project includes (i) pre-construction services to define the Company’s criteria for the industrial capacity Expansion Project, (ii) specialized industrial design services for the Expansion Project, (iii) specialty industrial equipment procurement and procedures are effective.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishinginstallation, and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Internal control over financial reporting refers(iv) all construction services necessary to complete any modifications to the process designed by, or underfacility in order to accommodate the supervision of, our Chief Executive Officerproduction line expansion, and Chief Financial Officer, and effected by our Board of Directors, management and other personnel, 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. Duepower to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions or that the degree of compliance with policies or procedures may deteriorate.
With the participationexpanded production capability. As of the Chief Executive Officer and Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in the 2013 “Internal Control—Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our internal control over financial reporting was effective as of June 30, 2016.
The effectiveness of our internal control over financial reporting has been audited by Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report which appears 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) during our fiscal quarteryear ended June 30, 2016, that2019, the Company has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.paid a total of $24.9 million associated with the expansion project.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Farmer Bros. Co.
Torrance, CaliforniaNotes to Consolidated Financial Statements (continued)
We have audited the internal control over financial reporting of Farmer Bros. Co.Note 12. Goodwill and subsidiaries (the "Company") as of June 30, 2016, based on criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission. Intangible Assets
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in 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 reportingfollowing is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel 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 dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate becausesummary of changes in conditions, or that the degreecarrying value of compliance withgoodwill (in thousands):
|
| | | | |
| Balance at June 30, 2017 | | $ | 10,996 |
|
| Final Purchase Price Allocation Adjustment (West Coast Coffee) | | (167 | ) |
| Additions (Boyd Coffee) | | 25,395 |
|
| Balance at June 30, 2018 | | $ | 36,224 |
|
| Additions | | — |
|
| Balance at June 30, 2019 | | $ | 36,224 |
|
There was no impairment of goodwill recorded during the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of June 30, 2016, based on the criteria established in Internal Control - Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the yearyears ended June 30, 20162019, 2018 and 2017.
The following is a summary of the CompanyCompany’s amortized and our report dated September 13, 2016 expressed an unqualified opinion on those financial statements.unamortized intangible assets other than goodwill:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | As of June 30, |
| | | Weighted Average Amortization Period as of June 30, 2019 | | 2019 | | 2018 |
| (In thousands) | | | Gross Carrying Amount | | Accumulated Amortization | | Net | | Gross Carrying Amount | | Accumulated Amortization | | Net |
| Amortized intangible assets: | | | | | | | | | | | | | | |
| Customer relationships | | 7.7 | | $ | 33,003 |
| | $ | (15,291 | ) | | $ | 17,712 |
| | $ | 33,003 |
| | $ | (12,903 | ) | | $ | 20,100 |
|
| Non-compete agreements | | 2.7 | | 220 |
| | (122 | ) | | 98 |
| | 220 |
| | (81 | ) | | 139 |
|
| Recipes | | 4.3 | | 930 |
| | (354 | ) | | 576 |
| | 930 |
| | (221 | ) | | 709 |
|
| Trade name/brand name | | 5.3 | | 510 |
| | (346 | ) | | 164 |
| | 510 |
| | (271 | ) | | 239 |
|
| Total amortized intangible assets | | | | $ | 34,663 |
| | $ | (16,113 | ) | | $ | 18,550 |
| | $ | 34,663 |
| | $ | (13,476 | ) | | $ | 21,187 |
|
| Unamortized intangible assets: | | | | | | | | | | | | | | |
| Trademarks, trade names and brand name with indefinite lives | | | | $ | 10,328 |
| | $ | — |
| | $ | 10,328 |
| | $ | 10,328 |
| | $ | — |
| | $ | 10,328 |
|
| Total unamortized intangible assets | | | | $ | 10,328 |
| | $ | — |
| | $ | 10,328 |
| | $ | 10,328 |
| | $ | — |
| | $ | 10,328 |
|
| Total intangible assets | | | | $ | 44,991 |
| | $ | (16,113 | ) | | $ | 28,878 |
| | $ | 44,991 |
| | $ | (13,476 | ) | | $ | 31,515 |
|
/s/ DELOITTE & TOUCHE LLPIn fiscal 2018, the Company recorded an impairment charge related to indefinite-lived intangible assets and other intangible assets of $3.5 million and $0.3 million, respectively. There were no indefinite-lived intangible asset and other intangible assets impairment charges recorded in the fiscal years ended June 30, 2019 or 2017.
Dallas, TexasAmortization expense for the years ended June 30, 2019, 2018, and 2017 were $2.6 million, $2.4 million, and $0.7 million, respectively.
September 13, 2016At June 30, 2019, future annual amortization of finite-lived intangible assets for the years 2020 through 2024 and thereafter is estimated to be (in thousands):
|
| | | | |
| For the fiscal year ending: | | |
| June 30, 2020 | | $ | 2,390 |
|
| June 30, 2021 | | 2,390 |
|
| June 30, 2022 | | 2,376 |
|
| June 30, 2023 | | 2,356 |
|
| June 30, 2024 | | 2,268 |
|
| Thereafter | | 6,770 |
|
| Total | | $ | 18,550 |
|
|
| |
Item 9B. | Other Information |
None.
PART III
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| |
Item 10. | Directors, Executive Officers and Corporate Governance |
Note 13. Employee Benefit Plans
The informationCompany provides benefit plans for full-time employees who work 30 hours or more per week, including 401(k), health and other welfare benefit plans and, in certain circumstances, pension benefits. Generally, the plans provide health benefits after 30 days and other retirement benefits based on years of service and/or a combination of years of service and earnings. In addition, the Company contributes to two multiemployer defined benefit pension plans, one multiemployer defined contribution pension plan and nine multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. In addition, the Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees and provides retiree medical coverage and, depending on the age of the retiree, dental and vision coverage. The Company also provides a postretirement death benefit to certain of its employees and retirees.
The Company is required by this item will be set forthto recognize the funded status of a benefit plan in its consolidated balance sheets. The Company is also required to recognize in other comprehensive income (loss) (“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. Co. Pension Plan for Salaried Employees (the “Farmer Bros. Plan”), for Company employees hired prior to January 1, 2010 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 Farmer Bros. Plan, and new hires are not eligible to participate in the Proxy StatementFarmer Bros. Plan. As all plan participants became inactive following this pension 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.
As of June 30, 2019, the Company also has two defined benefit pension plans for certain hourly employees covered under collective bargaining agreements (the “Brewmatic Plan” and is incorporatedthe “Hourly Employees' Plan”). Effective October 1, 2016, the Company froze benefit accruals and participation in this report by reference.the Hourly Employees' Plan. After the plan freeze, participants do not accrue any benefits under the plan, and new hires are not eligible to participate in the plan. After the freeze the participants in the plan are eligible to receive the Company's matching contributions to their 401(k).
Code of ConductEffective December 1, 2018 the Company amended and Ethics
We maintainterminated the Farmer Bros. Co. Pension Plan for Salaried Employees (the “Farmer Bros. Plan”), a written Code of Conduct and Ethicsdefined benefit pension plan for Company employees hired prior to January 1, 2010 who were not covered under a collective bargaining agreement. The Company previously amended the Farmer Bros. Plan, freezing the benefit for all employees, officers and directors, including our principal executive officer, principal financial officer, principal accounting officer or controller, and other persons performing similar functions. To view this Code of Conduct and Ethics free of charge, please visit our website at www.farmerbros.com (This website address is not intendedparticipants effective June 30, 2011.
Immediately prior to function as a hyperlink, and the information contained in our website is not intended to be a part of this filing). We intend to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an amendment to, or waiver from, a provision of this Code of Conduct and Ethics, if any, by posting such information on our website as set forth above.
Compliance with Section 16(a)termination of the Exchange Act
ToFarmer Bros. Plan, the Company’s knowledge, based solely on a reviewCompany spun off the benefit liability and obligations, and all allocable assets for all retirement plan benefits of certain active employees with accrued benefits in excess of $25,000, retirees and beneficiaries currently receiving benefit payments under the Farmer Bros. Plan, and former employees who have deferred vested benefits under the Farmer Bros. Plan, to the Brewmatic Plan. Upon termination of the copiesFarmer Bros. Plan, all remaining plan participants elected to receive a distribution of such reports furnishedhis/her entire accrued benefit under the Farmer Bros. Plan in a single cash lump sum or an individual insurance company annuity contract, in either case, funded directly by Farmer Bros. Plan assets.
Termination of the Farmer Bros. Plan triggered re-measurement and settlement of the Farmer Bros. Plan and re-measurement of the Brewmatic Plan. As a result of the distributions to the remaining plan participants of the Farmer Bros. Plan, the Company and written representations that no other reports were required duringrecognized a non-cash pension settlement charge of $10.9 million for the fiscal year ended June 30, 2016, its officers, directors2019.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Obligations and ten percent stockholders compliedFunded Status |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Farmer Bros. Plan As of June 30, | | Brewmatic Plan As of June 30, | | Hourly Employees’ Plan As of June 30, | | Total |
| ($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| Change in projected benefit obligation | | | | | | | | | | | | | | | | |
| Benefit obligation at the beginning of the year | | $ | 137,175 |
| | $ | 146,291 |
| | $ | 3,724 |
| | $ | 4,079 |
| | $ | 4,040 |
| | $ | 4,329 |
| | $ | 144,939 |
| | $ | 154,699 |
|
| Interest cost | | 2,722 |
| | 5,417 |
| | 2,339 |
| | 149 |
| | 161 |
| | 163 |
| | 5,222 |
| | 5,729 |
|
| Actuarial (gain) loss | | (1,571 | ) | | (5,956 | ) | | 8,482 |
| | (227 | ) | | 349 |
| | (370 | ) | | 7,260 |
| | (6,553 | ) |
| Benefits paid | | (3,574 | ) | | (8,577 | ) | | (3,097 | ) | | (277 | ) | | (75 | ) | | (82 | ) | | (6,746 | ) | | (8,936 | ) |
| Pension settlement | | (3,162 | ) | | — |
| | (21,286 | ) | | — |
| | — |
| | — |
| | (24,448 | ) | | — |
|
| Other - Plan merger | | $ | (131,590 | ) | | — |
| | 131,590 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Projected benefit obligation at the end of the year | | $ | — |
| | $ | 137,175 |
| | $ | 121,752 |
| | $ | 3,724 |
| | $ | 4,475 |
| | $ | 4,040 |
| | $ | 126,227 |
| | $ | 144,939 |
|
| Change in plan assets | | | | | | | | | | | | | | | | |
| Fair value of plan assets at the beginning of the year | | $ | 97,211 |
| | $ | 97,304 |
| | $ | 3,719 |
| | $ | 3,115 |
| | $ | 3,629 |
| | $ | 2,999 |
| | $ | 104,559 |
| | $ | 103,418 |
|
| Actual return on plan assets | | (6,236 | ) | | 5,874 |
| | 9,325 |
| | 201 |
| | 224 |
| | 198 |
| | 3,313 |
| | 6,273 |
|
| Employer contributions | | 1,525 |
| | 2,610 |
| | 1,800 |
| | 680 |
| | — |
| | 514 |
| | 3,325 |
| | 3,804 |
|
| Benefits paid | | (3,574 | ) | | (8,577 | ) | | (3,097 | ) | | (277 | ) | | (75 | ) | | (82 | ) | | (6,746 | ) | | (8,936 | ) |
| Pension settlement | | (3,162 | ) | | — |
| | (22,100 | ) | | — |
| | — |
| | — |
| | (25,262 | ) | | — |
|
| Other - Plan merger | | (85,764 | ) | | — |
| | 85,764 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Fair value of plan assets at the end of the year | | $ | — |
| | $ | 97,211 |
| | $ | 75,411 |
| | $ | 3,719 |
| | $ | 3,778 |
| | $ | 3,629 |
| | $ | 79,189 |
| | $ | 104,559 |
|
| Funded status at end of year (underfunded) overfunded | | $ | — |
| | $ | (39,964 | ) | | $ | (46,341 | ) | | $ | (5 | ) | | $ | (697 | ) | | $ | (411 | ) | | $ | (47,038 | ) | | $ | (40,380 | ) |
| Amounts recognized in consolidated balance sheets | | | | | | | | | | | | | |
| |
|
| Non-current liabilities | | — |
| | (39,964 | ) | | (46,341 | ) | | (5 | ) | | (697 | ) | | (411 | ) | | (47,038 | ) | | (40,380 | ) |
| Total | | $ | — |
| | $ | (39,964 | ) | | $ | (46,341 | ) | | $ | (5 | ) | | $ | (697 | ) | | $ | (411 | ) | | $ | (47,038 | ) | | $ | (40,380 | ) |
| Amounts recognized in AOCI | | | | | | | | | | | | | | | | |
| Net loss | | — |
| | 51,079 |
| | 50,080 |
| | 1,788 |
| | 565 |
| | 218 |
| | 50,645 |
| | 53,085 |
|
| Total AOCI (not adjusted for applicable tax) | | $ | — |
| | $ | 51,079 |
| | $ | 50,080 |
| | $ | 1,788 |
| | $ | 565 |
| | $ | 218 |
| | $ | 50,645 |
| | $ | 53,085 |
|
| Weighted average assumptions used to determine benefit obligations | | | | | | | | | | | | | | | | |
| Discount rate | | 4.10 | % | | 4.05 | % | | 3.45 | % | | 4.05 | % | | 3.45 | % | | 4.05 | % | | 4.05 | % | | 4.05 | % |
| Rate of compensation increase | | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Components of Net Periodic Benefit Cost and
Other Changes Recognized in Other Comprehensive Income (Loss) (OCI)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Farmer Bros. Plan June 30, | | Brewmatic Plan June 30, | | Hourly Employees’ Plan June 30, | | Total |
| ($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| Components of net periodic benefit cost | | | | | | | | | | | | | | | | |
| Interest cost | | 2,722 |
| | 5,417 |
| | 2,339 |
| | 149 |
| | 161 |
| | 163 |
| | 5,222 |
| | 5,729 |
|
| Expected return on plan assets | | (2,767 | ) | | (5,490 | ) | | (2,257 | ) | | (161 | ) | | (222 | ) | | (173 | ) | | (5,246 | ) | | (5,824 | ) |
| Amortization of net loss | | 710 |
| | 1,588 |
| | 796 |
| | 80 |
| | — |
| | 6 |
| | 1,506 |
| | 1,674 |
|
| Pension settlement charge | | 1,356 |
| | — |
| | 9,586 |
| | — |
| | — |
| | — |
| | 10,942 |
| | — |
|
| Net periodic benefit cost | | $ | 2,021 |
| | $ | 1,515 |
| | $ | 10,464 |
| | $ | 68 |
| | $ | (61 | ) | | $ | (4 | ) | | $ | 12,424 |
| | $ | 1,579 |
|
| Other changes recognized in OCI | | | | | | | | | | | | | | | | |
| Net loss | | $ | 7,433 |
| | $ | (6,340 | ) | | $ | 1,413 |
| | $ | (267 | ) | | $ | 347 |
| | $ | (394 | ) | | $ | 9,193 |
| | $ | (7,001 | ) |
| Prior service cost (credit) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Amortization of net loss | | (710 | ) | | (1,588 | ) | | (796 | ) | | (80 | ) | | — |
| | (6 | ) | | (1,506 | ) | | (1,674 | ) |
| Pension settlement charge | | (1,356 | ) | | — |
| | (9,586 | ) | | — |
| | — |
| | — |
| | (10,942 | ) | | — |
|
| Allocation of net Loss - Plan merger | | (56,446 | ) | | — |
| | 56,446 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net loss due to annuity purchase | | — |
| | — |
| | 814 |
| | — |
| | — |
| | — |
| | 814 |
| | — |
|
| Total recognized in OCI | | $ | (51,079 | ) | | $ | (7,928 | ) | | $ | 48,291 |
| | $ | (347 | ) | | $ | 347 |
| | $ | (400 | ) | | $ | (2,441 | ) | | $ | (8,675 | ) |
| Total recognized in net periodic benefit cost and OCI | | $ | (49,058 | ) | | $ | (6,413 | ) | | $ | 58,755 |
| | $ | (279 | ) | | $ | 286 |
| | $ | (404 | ) | | $ | 9,983 |
| | $ | (7,096 | ) |
| Weighted-average assumptions used to determine net periodic benefit cost | | | | | | | | | | | | | | | | |
| Discount rate | | 4.05 | % | | 3.80 | % | | 4.10 | % | | 3.80 | % | | 4.05 | % | | 3.80 | % | | 4.05 | % | | 3.80 | % |
| Expected long-term return on plan assets | | — | % | | 6.75 | % | | 6.75 | % | | 6.75 | % | | 6.75 | % | | 6.75 | % | | 6.75 | % | | 6.75 | % |
| Rate of compensation increase | | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
| | N/A |
|
Basis Used to Determine Expected Long-term Return on Plan Assets
The expected long-term return on plan assets assumption was developed as a weighted average rate based on the target asset allocation of the plan and the Long-Term Capital Market Assumptions (CMA) 2018. The capital market assumptions were developed with all applicable Section 16(a) filing requirements, except that, Michael H. Keown,a primary focus on forward-looking valuation models and market indicators. The key fundamental economic inputs for these models are future inflation, economic growth, and interest rate environment. Due to the long-term nature of the pension obligations, the investment horizon for the CMA 2018 is 20 to 30 years. In addition to forward-looking models, historical analysis of market data and trends was reflected, as well as the outlook of recognized economists, organizations and consensus CMA from other credible studies.
Description of Investment Policy
The Company’s investment strategy is to build an efficient, well-diversified portfolio based on a long-term, strategic outlook of the investment markets. The investment markets outlook utilizes both the historical-based and forward-looking return forecasts to establish future return expectations for various asset classes. These return expectations are used to develop a core asset allocation based on the specific needs of each plan. The core asset allocation utilizes investment portfolios of various asset classes and multiple investment managers in order to maximize the plan’s return while providing multiple layers of diversification to help minimize risk.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Farmer Bros. Plan June 30, | | Brewmatic Plan June 30, | | Hourly Employees’ Plan June 30, | | Total |
| ($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 | | 2019 | | 2018 |
| Comparison of obligations to plan assets | | | | | | | | | | | | | | | | |
| Projected benefit obligation | | $ | — |
| | $ | 137,175 |
| | $ | 121,752 |
| | $ | 3,724 |
| | $ | 4,475 |
| | $ | 4,040 |
| | $ | 126,227 |
| | $ | 144,939 |
|
| Accumulated benefit obligation | | $ | — |
| | $ | 137,175 |
| | $ | 121,752 |
| | $ | 3,724 |
| | $ | 4,475 |
| | $ | 4,040 |
| | $ | 126,227 |
| | $ | 144,939 |
|
| Fair value of plan assets at measurement date | | $ | — |
| | $ | 97,211 |
| | $ | 75,411 |
| | $ | 3,719 |
| | $ | 3,778 |
| | $ | 3,629 |
| | $ | 79,189 |
| | $ | 104,559 |
|
| Plan assets by category | | | | | | | | | | | | | | | | |
| Equity securities | | $ | — |
| | $ | 63,547 |
| | $ | 48,464 |
| | $ | 2,431 |
| | $ | 2,440 |
| | $ | 2,341 |
| | $ | 50,904 |
| | $ | 68,319 |
|
| Debt securities | | — |
| | 27,608 |
| | 22,461 |
| | 1,056 |
| | 1,100 |
| | 1,065 |
| | 23,561 |
| | 29,729 |
|
| Real estate | | — |
| | 6,056 |
| | 4,486 |
| | 232 |
| | 238 |
| | 223 |
| | 4,724 |
| | 6,511 |
|
| Total | | $ | — |
| | $ | 97,211 |
| | $ | 75,411 |
| | $ | 3,719 |
| | $ | 3,778 |
| | $ | 3,629 |
| | $ | 79,189 |
| | $ | 104,559 |
|
| Plan assets by category | | | | | | | | | | | | | | | | |
| Equity securities | | — | % | | 66 | % | | 64 | % | | 66 | % | | 65 | % | | 65 | % | | 64 | % | | 65 | % |
| Debt securities | | — | % | | 28 | % | | 30 | % | | 28 | % | | 29 | % | | 29 | % | | 30 | % | | 29 | % |
| Real estate | | — | % | | 6 | % | | 6 | % | | 6 | % | | 6 | % | | 6 | % | | 6 | % | | 6 | % |
| Total | | — | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % | | 100 | % |
Fair values of plan assets were as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | | As of June 30, 2019 |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 | | Investments measured at NAV |
| Brewmatic Plan | | $ | 75,411 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 75,411 |
|
| Hourly Employees’ Plan | | $ | 3,778 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,778 |
|
| | | As of June 30, 2018 |
| (In thousands) | | Total | | Level 1 | | Level 2 | | Level 3 | | Investments measured at NAV |
| Farmer Bros. Plan | | $ | 97,211 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 97,211 |
|
| Brewmatic Plan | | $ | 3,719 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,719 |
|
| Hourly Employees’ Plan | | $ | 3,629 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,629 |
|
The following is the target asset allocation for the Company's Presidentsingle employer pension plans— Brewmatic Plan and Chief executive Officer, filed a late Form 4 in December 2015 reporting the sale of vested restricted shares to cover tax withholding requirements and 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'sHourly Employees' Plan—for fiscal year ended June 30, 2016.
|
| | |
Item 11. | Executive CompensationFiscal 2020 |
| U.S. large cap equity securities | 37.0 | % |
| U.S. small cap equity securities | 4.6 | % |
| International equity securities | 22.4 | % |
| Debt securities | 30.0 | % |
| Real estate | 6.0 | % |
| Total | 100.0 | % |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Estimated Amounts in OCI Expected To Be Recognized
In fiscal 2020, the Company expects to recognize net periodic benefit costs of $1.4 million for the Brewmatic Plan and recognize net periodic benefit credit of $75,000 for the Hourly Employees’ Plan.
Estimated Future Contributions and Refunds
In fiscal 2020, the Company expects to contribute $4.0 million to the Brewmatic Plan and does not expect to contribute to the Hourly Employees’ Plan. The information requiredCompany is not aware of any refunds expected from single employer pension plans.
Estimated Future Benefit Payments
The following benefit payments are expected to be paid over the next 10 fiscal years:
|
| | | | | | | | | |
| (In thousands) | | | Brewmatic Plan | | Hourly Employees’ Plan |
| Year Ending: | | |
| June 30, 2020 | | | $ | 6,720 |
| | $ | 130 |
|
| June 30, 2021 | | | $ | 6,550 |
| | $ | 150 |
|
| June 30, 2022 | | | $ | 6,770 |
| | $ | 160 |
|
| June 30, 2023 | | | $ | 6,940 |
| | $ | 180 |
|
| June 30, 2024 | | | $ | 7,060 |
| | $ | 190 |
|
| June 30, 2025 to June 30, 2029 | | | $ | 35,450 |
| | $ | 1,100 |
|
These amounts are based on current data and assumptions and reflect expected future service, as appropriate.
Multiemployer Pension Plans
The Company participates in two multiemployer defined benefit pension plans that are union sponsored and collectively bargained for the benefit of certain employees subject to collective bargaining agreements, of which the Western Conference of Teamsters Pension Plan ("WCTPP") is individually significant. The Company makes contributions to these plans generally based on the number of hours worked by this item willthe 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 employer may be set forthused 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 Proxy Statementmultiemployer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Company received a letter dated July 10, 2018 from the WCT Pension Trust assessing withdrawal liability against the Company for a share of the WCTPP unfunded vested benefits, on the basis claimed by the WCT Pension Trust that employment actions by the Company in 2016 in connection with the Corporate Relocation Plan constituted a partial withdrawal from the WCTPP. The Company agreed with the WCT Pension Trust’s assessment of pension withdrawal liability in the amount of $3.4 million, including interest, which is payable in 17 monthly installments of $190,507 followed by a final monthly installment of $153,822, commencing September 10, 2018. At June 30, 2019 the Company had $1.5 million on its consolidated balance sheet relating to this obligation in “Accrued payroll expenses.”
In fiscal 2012, the Company withdrew from the Local 807 Labor-Management Pension Fund (“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. On November 18, 2014, the Pension Fund sent the Company a notice of assessment of withdrawal liability in the amount of $4.4 million, which the Pension Fund adjusted to $4.9 million on January 5, 2015. In December 2018, the parties agreed to settle the Company’s remaining withdrawal liability to the Local 807 Pension Fund for a lump sum cash settlement payment of $3.0 million plus two remaining installment payments of $91,000 due on or before October 1, 2034 and on or before January 1, 2035. At June 30, 2019, the Company has paid the Local 807 Pension Fund $3.0 million and has accrued $0.2 million within “Accrued pension liabilities” on the Company’s condensed consolidated balance sheet.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
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.
Contributions made by the Company to the multiemployer pension plans are as follows:
|
| | | | | | | | |
| (In thousands) | | WCTPP(1)(2)(3) | | All Other Plans(4) |
| Year Ended: | | | | |
| June 30, 2019 | | $ | 3,634 |
| | $ | 39 |
|
| June 30, 2018 | | $ | 1,605 |
| | $ | 35 |
|
| June 30, 2017 | | $ | 2,114 |
| | $ | 39 |
|
____________
| |
| (1) | Individually significant plan. |
| |
| (2) | Less than 5% of total contribution to WCTPP based on WCTPP's FASB Disclosure Statement for the calendar year ended December 31, 2018. |
| |
| (3) | The Company guarantees that one hundred seventy-three (173) hours will be contributed upon for all employees who are compensated for all available straight time hours for each calendar month. An additional 6.5% of the basic contribution must be paid for PEER or the Program for Enhanced Early Retirement. |
| |
| (4) | Includes one plan that is not individually significant. |
Multiemployer Plans Other Than Pension Plans
The Company participates in nine multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. The plans are subject to the provisions of the Employee Retirement Income Security Act of 1974, and provide that participating employers make monthly contributions to the plans in an amount as specified in the collective bargaining agreements. Also, the plans provide that participants make self-payments to the plans, the amounts of which are negotiated through the collective bargaining process. The Company's participation in these plans is incorporatedgoverned by collective bargaining agreements which expires on or before June 30, 2022. The Company's aggregate contributions to multiemployer plans other than pension plans in this report by reference.the fiscal years ended June 30, 2019, 2018 and 2017 were $5.2 million, $4.8 million and $5.3 million, respectively. The Company expects to contribute an aggregate of $5.8 million towards multiemployer plans other than pension plans in fiscal 2020.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
401(k) Plan
The Company's 401(k) Plan is available to all eligible employees. The Company's 401(k) match portion is available to all eligible employees who have worked more than 1,000 hours during a calendar year and were employed at the end of the calendar year. Participants in the 401(k) Plan may choose to contribute a percentage of their annual pay subject to the maximum contribution allowed by the Internal Revenue Service. The Company's matching contribution is discretionary, based on approval by the Company's Board of Directors. The Company matching contribution for the calendar years 2019, 2018 and 2017, was 50% of an employee's annual contribution to the 401(k) Plan, up to 6% of the employee's eligible income. The Company recorded matching contributions of $2.2 million, $2.0 million and $1.6 million in operating expenses for the fiscal years ended June 30, 2019, 2018 and 2017, respectively.
Effective January 1, 2019, the Company amended and restated the 401(k) Plan to, among other things, provide for: (i) an annual safe harbor non-elective contribution of shares of the Company’s common stock equal to 4% of each eligible participant’s annual plan compensation; (ii) an elective matching contribution for non-collectively bargained employees and certain union-represented employees equal to 100% of the first 3% of such eligible participant’s tax-deferred contributions to the 401(k) Plan; and (iii) profit-sharing contributions at the Company’s discretion. Participants are immediately vested in their contributions, the safe harbor non-elective contributions, the employer’s elective matching contributions, and the employer’s discretionary contributions. For the fiscal year ended June 30, 2019, the Company contributed a total of 90,105 shares of the Company’s common stock with a value of $1.6 million to eligible participants’ annual plan compensation. In July 2019, 52,534 shares of the 90,105 shares were issued.
Postretirement Benefits
The Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees (“Retiree Medical Plan”). The plan provides medical, dental and vision coverage for retirees under age 65 and medical coverage only for retirees age 65 and above. Under this postretirement plan, the Company’s contributions toward premiums for retiree medical, dental and vision coverage for participants and dependents are scaled based on length of service, with greater Company contributions for retirees with greater length of service, subject to a maximum monthly Company contribution. The Company's retiree medical, dental and vision plan is unfunded, and its liability was calculated using an assumed discount rate of 3.6% at June 30, 2019. The Company projects an initial medical trend rate of 8.1% in fiscal 2020, ultimately reducing to 4.5% in 10 years.
The Company also provides a postretirement death benefit (“Death Benefit”) to certain of its employees and retirees, subject, in the case of current employees, to continued employment with the Company until retirement and certain other conditions related to the manner of employment termination and manner of death. The Company records the actuarially determined liability for the present value of the postretirement death benefit. The Company has purchased life insurance policies to fund the postretirement death benefit wherein the Company owns the policy but the postretirement death benefit is paid to the employee's or retiree's beneficiary. The Company records an asset for the fair value of the life insurance policies which equates to the cash surrender value of the policies.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Retiree Medical Plan and Death Benefit
The following table shows the components of net periodic postretirement benefit cost for the Retiree Medical Plan and Death Benefit for the fiscal years ended June 30, 2019, 2018 and 2017. Net periodic postretirement benefit cost for fiscal 2019 was based on employee census information as of June 30, 2019.
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Components of Net Periodic Postretirement Benefit Cost (Credit): | | | | | | |
| Service cost | | $ | 530 |
| | $ | 609 |
| | $ | 760 |
|
| Interest cost | | 887 |
| | 835 |
| | 829 |
|
| Amortization of net gain | | (834 | ) | | (841 | ) | | (630 | ) |
| Amortization of prior service credit | | (1,757 | ) | | (1,757 | ) | | (1,757 | ) |
| Net periodic postretirement benefit (credit) cost | | $ | (1,174 | ) | | $ | (1,154 | ) | | $ | (798 | ) |
The difference between the assets and the Accumulated Postretirement Benefit Obligation (APBO) at the adoption of ASC 715-60 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)-Medical only ($ in thousands):
|
| | | | | | | | | | | |
| Date Established | | Balance at July 1, 2019 | | Annual Amortization | | Years Remaining | |
| January 1, 2008 | | $ | (41 | ) | | $ | 41 |
| | 0.2 | |
| July 1, 2012 | | (6,895 | ) | | 1,527 |
| | 4.5 | |
| | | $ | (6,936 | ) | | $ | 1,568 |
| | | |
|
| | | | | | | | | | | | | | | | |
| | | Retiree Medical Plan | | Death Benefit |
| | | Year Ended June 30, | | Year Ended June 30, |
| ($ in thousands) | | 2019 | | 2018 | | 2019 | | 2018 |
| Amortization of Net (Gain) Loss: | | | | | | | | |
| Net (gain) loss as of July 1 | | $ | (7,039 | ) | | $ | (9,206 | ) | | $ | 1,878 |
| | $ | 1,201 |
|
| Net (gain) loss subject to amortization | | (7,039 | ) | | (9,206 | ) | | 1,878 |
| | 1,201 |
|
| Corridor (10% of greater of APBO or assets) | | 1,490 |
| | 1,280 |
| | 919 |
| | (848 | ) |
| Net (gain) loss in excess of corridor | | $ | (5,549 | ) | | $ | (7,926 | ) | | $ | 2,797 |
| | $ | 353 |
|
| Amortization years | | 8.6 |
| | 8.9 |
| | 6.5 |
| | 6.4 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following tables provide a reconciliation of the benefit obligation and plan assets:
|
| | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2019 | | 2018 |
| Change in Benefit Obligation: | | | | |
| Projected postretirement benefit obligation at beginning of year | | $ | 21,283 |
| | $ | 20,680 |
|
| Service cost | | 530 |
| | 609 |
|
| Interest cost | | 887 |
| | 835 |
|
| Participant contributions | | 605 |
| | 699 |
|
| Actuarial gains (losses) | | 2,010 |
| | (70 | ) |
| Benefits paid | | (1,223 | ) | | (1,470 | ) |
| Projected postretirement benefit obligation at end of year | | $ | 24,092 |
| | $ | 21,283 |
|
|
| | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2019 | | 2018 |
| Change in Plan Assets: | | | | |
| Fair value of plan assets at beginning of year | | $ | — |
| | $ | — |
|
| Employer contributions | | 618 |
| | 771 |
|
| Participant contributions | | 605 |
| | 699 |
|
| Benefits paid | | (1,223 | ) | | (1,470 | ) |
| Fair value of plan assets at end of year | | $ | — |
| | $ | — |
|
| Projected postretirement benefit obligation at end of year | | 24,092 |
| | 21,283 |
|
| Funded status of plan | | $ | (24,092 | ) | | $ | (21,283 | ) |
|
| | | | | | | | |
| | | June 30, |
| (In thousands) | | 2019 | | 2018 |
| Amounts Recognized in the Consolidated Balance Sheets Consist of: | | | | |
| Current liabilities | | $ | (1,068 | ) | | $ | (810 | ) |
| Non-current liabilities | | (23,024 | ) | | (20,473 | ) |
| Total | | $ | (24,092 | ) | | $ | (21,283 | ) |
|
| | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2019 | | 2018 |
| Amounts Recognized in AOCI Consist of: | | | | |
| Net gain | | $ | (5,160 | ) | | $ | (8,005 | ) |
| Prior service credit | | (6,936 | ) | | (8,693 | ) |
| Total AOCI | | $ | (12,096 | ) | | $ | (16,698 | ) |
|
| | | | | | | | |
| | | Year Ended June 30, |
| (In thousands) | | 2019 | | 2018 |
| Other Changes in Plan Assets and Benefit Obligations Recognized in OCI: | | | | |
| Unrecognized actuarial gains (loss) | | $ | 2,010 |
| | $ | (70 | ) |
| Amortization of net loss | | 835 |
| | 840 |
|
| Amortization of prior service cost | | 1,757 |
| | 1,757 |
|
| Total recognized in OCI | | 4,602 |
| | 2,527 |
|
| Net periodic benefit cost | | (1,174 | ) | | (1,154 | ) |
| Total recognized in net periodic benefit credit and OCI | | $ | 3,428 |
| | $ | 1,373 |
|
The estimated net gain and prior service credit that will be amortized from AOCI into net periodic benefit cost in fiscal 2020 are $0.6 million and $1.6 million, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| | | |
| (In thousands) | |
| Estimated Future Benefit Payments: | |
| Year Ending: | |
| June 30, 2020 | $ | 1,087 |
|
| June 30, 2021 | $ | 1,138 |
|
| June 30, 2022 | $ | 1,173 |
|
| June 30, 2023 | $ | 1,220 |
|
| June 30, 2024 | $ | 1,248 |
|
| June 30, 2025 to June 30, 2029 | $ | 7,116 |
|
| | |
| Expected Contributions: | |
| June 30, 2020 | $ | 1,087 |
|
Sensitivity in Fiscal 2020 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 2020:
|
| | | | | | | | |
| | | 1-Percentage Point |
| (In thousands) | | Increase | | Decrease |
| Effect on total of service and interest cost components | | $ | 67 |
| | $ | (58 | ) |
| Effect on accumulated postretirement benefit obligation | | $ | 814 |
| | $ | (745 | ) |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 14. Revolving Credit Facility
On November 6, 2018, the Company entered into a new $150.0 million senior secured revolving credit facility (the “New Revolving Facility”) with Bank of America, N.A, Citibank, N.A., JPMorgan Chase Bank, N.A., PNC Bank, National Association, Regions Bank, and SunTrust Bank, with a sublimit on letters of credit and swingline loans of $15.0 million each. The New Revolving Facility includes an accordion feature whereby the Company may increase the revolving commitments or enter into one or more tranches of incremental term loans, up to an additional $75.0 million in aggregate of increased commitments and incremental term loans, subject to certain conditions. The commitment fee is based on a leverage grid and ranges from 0.20% to 0.40%. Borrowings under the New Revolving Facility bear interest based on a leverage grid with a range of PRIME + 0.25% to PRIME + 0.875% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 1.875%. Effective March 27, 2019, the Company entered into a Rate Swap utilizing a notional amount of $80.0 million, with an effective date of April 11, 2019 and a maturity date of October 11, 2023. Under the terms of the Rate Swap, the Company receives 1-month LIBOR, subject to a 0% floor, and makes payments based on a fixed rate of 2.1975%. The Company’s obligations under the ISDA are secured by the collateral which secures the loans under the New Revolving Facility on a pari passu and pro rata basis with the principal of such loans. The Company has designated the Rate Swap derivative instruments as a cash flow hedge.
Under the New Revolving Facility, the Company is subject to a variety of affirmative and negative covenants of types customary in a senior secured lending facility, including financial covenants relating to leverage and interest expense coverage. The Company is allowed to pay dividends, provided, among other things, a total net leverage ratio is met, and no default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The New Revolving Facility matures on November 6, 2023, subject to the ability for the Company (subject to certain conditions) to agree with lenders who so consent to extend the maturity date of the commitments of such consenting lenders for a period of one year, such option being exercisable not more than two times during the term of the facility.
The New Revolving Facility replaced, by way of amendment and restatement, the Company’s senior secured revolving credit facility (the “Prior Revolving Facility”) with JPMorgan Chase Bank, N.A. and SunTrust Bank, with revolving commitments of $125.0 million as of September 30, 2018 and $135.0 million as of October 18, 2018 (the “Third Amendment Effective Date”), subject to an accordion feature. Under the Prior Revolving Facility, as amended, advances were based on the Company’s eligible accounts receivable, inventory and equipment, the value of certain real property and trademarks, and an amount based on the lesser of $10.0 million (subject to monthly reduction) and the sum of certain eligible accounts receivable and inventory, less required reserves. The commitment fee was a flat fee of 0.25% per annum. Outstanding obligations were collateralized by all of the Company’s assets, excluding, amongst other things, certain real property not included in the borrowing base. Borrowings under the Prior Revolving Facility bore interest based on average historical excess availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%; provided, that, after the Third Amendment Effective Date, (i) the applicable rate was PRIME + 0.25% or Adjusted LIBO Rate + 1.75%; and (ii) loans up to certain formula amounts were subject to an additional margin ranging from 0.375% to 0.50%. The Prior Revolving Facility included a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including a financial covenant relating to the maintenance of a fixed charge coverage ratio, and provided for customary events of default.
At June 30, 2019, the Company was eligible to borrow up to a total of $150.0 million under the New Revolving Facility and had outstanding borrowings of $92.0 million and had utilized $2.3 million of the letters of credit sublimit. At June 30, 2019 and 2018, the weighted average interest rate on the Company’s outstanding borrowings subject to interest rate variability under the New Revolving Facility was 3.98% and 4.10%, respectively, and the Company was in compliance with all of the covenants under the New Revolving Facility.
The Company classifies borrowings contractually due to be settled one year or less as short-term and more than one year as long-term. Outstanding borrowings under the Company’s revolving credit facility were classified on the Company’s consolidated balance sheets as “Long-term borrowings under revolving credit facility” at June 30, 2019 and “Short-Term borrowings under revolving credit facility” at June 30, 2018.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 15. Employee Stock Ownership Plan
As of December 31, 2018, the Company froze the ESOP such that (i) no employees of the Company may commence participation in the ESOP on or after December 31, 2018; (ii) no Company contributions will be made to the ESOP with respect to services performed or compensation received after December 31, 2018; and (iii) the ESOP accounts of all individuals who are actively employed by the Company and participating in the ESOP on December 31, 2018 will be fully vested as of such date. Additionally, the Administrative Committee, with the consent of the Board of Directors, designated certain employees who were terminated in connection with certain reductions-in-force in 2018 to be fully vested in their ESOP accounts as of their severance dates.
The Company’s ESOP was established in 2000. The plan was a leveraged ESOP in which the Company was the lender. One of the two loans established to fund the ESOP matured in fiscal 2016 and the remaining loan was scheduled to mature in December 2018. The loan was repaid from the Company’s discretionary plan contributions over the original 15 year term with a variable rate of interest. The annual interest rate was 3.71% at December 31, 2018 when the plan was frozen.
|
| | | | | | |
| | | As of June 30, |
| | | 2019 | | 2018 | | 2017 |
| Loan amount (in thousands) | | $— | | $2,145 | | $4,289 |
Shares were held by the plan trustee for allocation among participants as the loan was repaid. The unencumbered shares were 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.
Historically, the Company used the dividends, if any, on ESOP shares to pay down the loans, and allocated to the ESOP participant shares equivalent to the fair market value of the dividends they would have received. No dividends were paid in fiscal 2019, 2018 or 2017.
During the fiscal years ended June 30, 2019, 2018 and 2017, the Company charged $0.9 million, $2.3 million and $2.5 million, respectively, to compensation expense related to the ESOP. The difference between cost and fair market value of committed to be released shares was recorded as additional paid-in-capital.
|
| | | | | | | | |
| | | As of June 30, |
| | | 2019 | | 2018 |
| Allocated shares | | 1,393,530 |
| | 1,502,323 |
|
| Committed to be released shares | | — |
| | 73,826 |
|
| Unallocated shares | | — |
| | 72,114 |
|
| Total ESOP shares | | 1,393,530 |
| | 1,648,263 |
|
| | | | | |
| (In thousands) | | | | |
| Fair value of ESOP shares | | $ | 22,812 |
| | $ | 50,354 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
| |
Item 12. | Security Ownership of Certain Beneficial OwnersNote 16. Share-based Compensation Farmer Bros. Co. 2017 Long-Term Incentive Plan On June 20, 2017 (the “Effective Date“), the Company’s stockholders approved the Farmer Bros. Co. 2017 Long-Term Incentive Plan (the “2017 Plan”). The 2017 Plan succeeded the Company's prior long-term incentive plans, the Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (the “Amended Equity Plan“) and Management and Related Stockholder Matters |
The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.
Equity Compensation Plan Information
Information about our equity compensation plans at June 30, 2016 that were either approved or not approved by our stockholders was as follows:
|
| | | | | | |
| 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) | | 508,228 | | $20.66 | | 151,857 |
| Equity compensation plans not approved by stockholders | | — | | — | | — |
| Total | | 508,228 | | $20.66 | | 151,857 |
________________
(1) Includes shares issued under the Amended Equity Plan and its predecessor plan, the Farmer Bros. Co. 2007 Omnibus Plan (collectively, the “Prior Plans“). On the Effective Date, the Company ceased granting awards under the Prior Plans; however, awards outstanding under the Prior Plans will remain subject to the terms of the applicable Prior Plan.
(2) SharesThe 2017 Plan provides for the grant of stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance shares and other stock- or cash-based awards to eligible participants. Non-employee directors of the Company and employees of the Company or any of its subsidiaries are eligible to receive awards under the 2017 Plan. The 2017 Plan authorizes the issuance of (i) 900,000 shares of common stock plus (ii) the number of shares of common stock subject to awards under the Company’s Prior Plans that are outstanding as of the Effective Date and that expire or are forfeited, cancelled or similarly lapse following the Effective Date. Subject to certain limitations, shares of common stock covered by awards granted under the 2017 Plan that are forfeited, expire or lapse, or are repurchased for or paid in cash, may be used again for new grants under the 2017 Plan. As of June 30, 2019, there were 1,021,771 maximum shares available under the 2017 Plan including shares that were forfeited under the Prior Plans of which 740,429 shares remain available for future issuanceissuance. Shares of common stock granted under the Amended Equity2017 Plan may be awardedauthorized but unissued shares, shares purchased on the open market or treasury shares. In no event will more than 900,000 shares of common stock be issuable pursuant to the exercise of incentive stock options under the 2017 Plan.
The 2017 Plan includes annual limits on certain awards that may be granted to any individual participant. The maximum aggregate number of shares of common stock with respect to all stock options and stock appreciation rights that may be granted to any one person during any calendar year is 250,000 shares. The 2017 Plan also includes limits on the maximum aggregate amount that may become payable pursuant to all performance bonus awards that may be granted to any one person during any calendar year and the maximum amount that may become payable pursuant to all cash-based awards granted under the 2017 Plan and the aggregate grant date fair value of all equity-based awards granted under the 2017 Plan to any non-employee director during any calendar year for services as a member of the Board.
The 2017 Plan contains a minimum vesting requirement, subject to limited exceptions, that awards made under the 2017 Plan may not vest earlier than the date that is one year following the grant date of the award. The 2017 Plan also contains provisions with respect to payment of exercise or purchase prices, vesting and expiration of awards, adjustments and treatment of awards upon certain corporate transactions, including stock splits, recapitalizations and mergers, transferability of awards and tax withholding requirements.
The 2017 Plan may be amended or terminated by the Board at any time, subject to certain limitations requiring stockholder consent or the consent of the applicable participant. In addition, the administrator may not, without the approval of the Company’s stockholders, authorize certain re-pricings of any outstanding stock options or stock appreciation rights granted under the 2017 Plan. The 2017 Plan will expire on June 20, 2027.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Non-qualified stock options with time-based vesting (“NQOs”)
One-third of the total number of NQO vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.
Following are the assumptions used in the formBlack-Scholes valuation model for NQOs granted on the date of performance-basedthe grant during the fiscal years ended June 30, 2019, 2018 and 2017:
|
| | | | | | | | | | | | |
| | | Year Ended June 30, |
| | | 2019 | | 2018 | | 2017 |
| Weighted average fair value of NQOs | | $ | 7.78 |
| | $ | 10.41 |
| | $ | — |
|
| Risk-free interest rate | | 3.0 | % | | 2.0 | % | | — | % |
| Dividend yield | | — | % | | — | % | | — | % |
| Average expected term | | 4.6 years |
| | 4.6 years |
| | 0 |
|
| Expected stock price volatility | | 29.6 | % | | 35.4 | % | | — | % |
The Company’s assumption regarding expected stock options, restrictedprice volatility is based on the historical volatility of the Company’s stock price. The risk-free interest rate is based on U.S. Treasury zero-coupon issues at the date of grant with a remaining term equal to the expected life of the stock options. The average expected term is based on historical weighted time outstanding and the expected weighted time outstanding calculated by assuming the settlement of outstanding awards another cash-based award or other incentive payable in cash. Shares covered byat the midpoint between the vesting date and the end of the contractual term of the award. Currently, management estimates an award will be counted as usedannual forfeiture rate of 13.0% based on actual forfeiture experience. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The following table summarizes NQO activity for the year ended June 30, 2019: |
| | | | | | | | | | |
| Outstanding NQOs: | | Number of NQOs | | Weighted Average Exercise Price ($) | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value ($ in thousands) |
| Outstanding at June 30, 2018 | | 161,324 |
| | 26.82 | | 5.1 | | 741 |
|
| Granted | | 154,263 |
| | 25.04 | | — | | — |
|
| Exercised | | (28,798 | ) | | 11.32 | | — | | 466 |
|
| Forfeited | | (87,861 | ) | | 27.53 | | — | | — |
|
| Expired | | (879 | ) | | 31.70 | | — | | — |
|
| Outstanding at June 30, 2019 | | 198,049 |
| | 27.35 | | 5.25 | | 40 |
|
| Exercisable at June 30, 2019 | | 50,229 |
| | 27.72 | | 2.93 | | 40 |
|
The weighted-average grant-date fair value of options granted during the year ended June 30, 2019 was $8.66.
The aggregate intrinsic values outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic value, based on the Company’s closing stock price of $16.37 at June 28, 2019 and $30.55 at June 29, 2018, representing the last trading day of the respective fiscal years, which would have been received by NQO holders had all award holders exercised their NQOs that were in-the-money as of those dates. The aggregate intrinsic value of NQO exercises in each fiscal period above represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. NQOs outstanding that are expected to vest are net of estimated forfeitures.
The Company received $0.3 million, $1.1 million and $0.5 million in proceeds from exercises of vested NQOs in fiscal 2019, 2018 and 2017, respectively.
As of June 30, 2019 and 2018, respectively, there was $1.1 million and $1.0 million of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at June 30, 2019 is expected to be recognized over the weighted average period of 2.03 years. Total compensation expense for NQOs was $0.5 million, $0.3 million and $0.1 million in fiscal 2019, 2018 and 2017, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Non-qualified stock options with performance-based and time-based vesting (“PNQs”)
PNQ shares granted to a participant. If any award lapses, expires, terminates or is canceled prior to the issuance of shares thereunder or if sharesfor each fiscal year are issued under the Amended Equity Plan to a participant and are thereafter reacquired by the Company, the shares subject to such awardsforfeiture if a target modified net income goal is not attained. For this purpose, “Modified Net Income” is defined as net income (GAAP) before taxes and excluding any gains or losses from sales of assets, and excluding the reacquired shares will again be available for issuance undereffect of restructuring and other transition expenses. These PNQs have an exercise price equal the Amended Equity Plan. In addition toclosing price of the shares that are actually issued to a participant,Company’s common stock on the following items will be counted againstdate of grant. One-third of the total number of shares availablesubject to each such stock option vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.
Following are the assumptions used in the Black-Scholes valuation model for issuancePNQs granted during the fiscal year ended, June 30, 2017, (PNQ shares were not granted during the fiscal years ended June 30, 2019 and 2018):
|
| | | | |
| | | Year Ended June 30, |
| | | 2017 |
| Weighted average fair value of PNQs | | $ | 11.42 |
|
| Risk-free interest rate | | 1.5 | % |
| Dividend yield | | — | % |
| Average expected term | | 4.9 years |
|
| Expected stock price volatility | | 37.7 | % |
The following table summarizes PNQ activity for the year ended June 30, 2019:
|
| | | | | | | | | | |
| Outstanding PNQs: | | Number of PNQs | | Weighted Average Exercise Price ($) | | Weighted Average Remaining Life (Years) | | Aggregate Intrinsic Value ($ in thousands) |
| Outstanding at June 30, 2018 | | 300,708 |
| | 27.08 | | 4.0 | | 1,207 |
|
| Granted | | — |
| | — | | — | | — |
|
| Exercised | | (5,806 | ) | | 22.70 | | — | | — |
|
| Forfeited | | (50,451 | ) | | 31.45 | | — | | — |
|
| Expired | | (14,490 | ) | | 27.50 | | — | | — |
|
| Outstanding at June 30, 2019 | | 229,961 |
| | 26.21 | | 1.23 | | — |
|
| Exercisable at June 30, 2019 | | 203,021 |
| | 25.48 | | 0.86 | | — |
|
The aggregate intrinsic values outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of $16.37 at June 28, 2019 and $30.55 at June 29, 2018, representing the last trading day of the respective fiscal years, which would have been received by PNQ holders had all award holders exercised their PNQs that were in-the-money as of those dates. The aggregate intrinsic value of PNQ exercises in each fiscal period represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. PNQs outstanding that are expected to vest are net of estimated forfeitures.
The Company received $0.1 million, $0.3 million and $0.2 million in proceeds from exercises of vested PNQs in fiscal 2019, 2018 and 2017, respectively.
As of June 30, 2019 and 2018, there was $39.7 thousand and $0.5 million, respectively, of unrecognized compensation cost related to PNQs. The unrecognized compensation cost related to PNQs at June 30, 2019 is expected to be recognized over the weighted average period of 0.36 years. Total compensation expense related to PNQs in fiscal 2019, 2018 and 2017 was $0.3 million, $0.8 million and $1.1 million, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Restricted Stock
Restricted stock awards cliff vest on the earlier of the one year anniversary of the grant date or the date of the first annual meeting of the Company’s stockholders immediately following the grant date, in the case of non-employee directors, and the third anniversary of the grant date, in the case of eligible employees, in each case subject to continued service to the Company through the vesting date and the acceleration provisions of the 2017 Plan and restricted stock agreement. Restricted stock is expected to vest net of estimated forfeitures.
The following table summarizes restricted stock activity for the year ended June 30, 2019: |
| | | | | |
| Outstanding and Nonvested Restricted Stock Awards: | | Shares Awarded | | Weighted Average Grant Date Fair Value ($) |
| Outstanding at June 30, 2018 | | 14,958 |
| | 33.48 |
| Granted | | 30,352 |
| | 20.8 |
| Exercised/Released | | (13,254 | ) | | 33.7 |
| Cancelled/Forfeited | | — |
| | — |
| Outstanding and nonvested at June 30, 2019 | | 32,056 |
| | 21.1 |
The total grant-date fair value of restricted stock granted during the year ended June 30, 2019 was $0.7 million.
As of June 30, 2019 and 2018, there was 0.4 million and $0.3 million, respectively, of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at June 30, 2019 is expected to be recognized over the weighted average period of 0.74 years. Total compensation expense for restricted stock was $23.0 thousand, $0.3 million and $0.2 million, for the fiscal years ended June 30, 2019, 2018 and 2017, respectively.
Performance-Based Restricted Stock Units (“PBRSUs”)
The PBRSU awards cliff vest on the third anniversary of the date of grant based on the Company’s achievement of certain financial performance goals during the performance periods, subject to certain continued employment conditions and subject to acceleration provisions of the 2017 Plan and restricted stock unit agreement. At the end of the three-year performance period, the number of PBRSUs that actually vest will be 0% to 150% of the target amount, depending on the extent to which the Company meets or exceeds the achievement of those financial performance goals measured over the full three-year performance period. PBRSUs are expected to vest net of estimated forfeitures.
The following table summarizes PBRSU activity for the year ended June 30, 2019: |
| | | | | |
| Outstanding and Nonvested PBRSUs: | | PBRSUs Awarded | | Weighted Average Grant Date Fair Value ($) |
| Outstanding and nonvested at June 30, 2018 | | 35,732 |
| | 31.70 |
| Granted(1) | | 47,928 |
| | 25.04 |
| Vested/Released | | — |
| | — |
| Cancelled/Forfeited | | (32,423 | ) | | 28.19 |
| Outstanding and nonvested at June 30, 2019 | | 51,237 |
| | 27.69 |
| Expected to vest at June 30, 2019 | | — |
| | — |
The total grant-date fair value of PBRSUs granted during the year ended June 30, 2019 was $1.2 million.
As of June 30, 2019 and 2018, there was $0.3 million and $0.9 million, respectively, of unrecognized compensation cost related to PBRSUs. The unrecognized compensation cost related to PBRSUs at June 30, 2019 is expected to be recognized over the weighted average period of 2.04 years. Total compensation expense for PBRSUs was $0.2 million for the year ended June 30, 2018. There was no compensation expense for PBRSUs for the fiscal years ended June 30, 2019 and 2017.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 17. Other Current Liabilities
Other current liabilities consist of the following:
|
| | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2019 | | 2018 |
| Accrued postretirement benefits | | $ | 1,068 |
| | $ | 810 |
|
| Accrued workers’ compensation liabilities | | 1,495 |
| | 1,698 |
|
| Short-term pension liabilities(1) | | — |
| | 3,761 |
|
| Earnout payable(2) | | 1,000 |
| | 600 |
|
| Working capital dispute payable(3) | | 354 |
| | — |
|
| Other(4) | | 3,392 |
| | 3,790 |
|
| Other current liabilities | | $ | 7,309 |
| | $ | 10,659 |
|
___________
(1) Amount recorded at June 30, 2018 represents the present value of the Company’s estimated withdrawal liability under the Amended Equity Plan: (i) shares subject to an award that are not delivered to a participant becauseLocal 807 Pension Fund, which was settled as of December 31, 2018.
(2) Represents the award is exercised through a reductionestimated fair value 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 satisfaction of the withholding of taxes incurredearnout payable in connection with the exerciseCompany’s acquisition of or issuancesubstantially all of shares under certain typesthe assets of awards;West Coast Coffee completed on February 7, 2017.
(3) Represents accrued expenses related to working capital disputes in connection with the Company's acquisition of Boyd Coffee on October 2, 2017.
(4) Includes accrued property taxes, sales and (iii) shares that are tendered touse taxes, insurance liabilities and the Company to pay the exercise pricecurrent portion of any option. The following items will not be counted against the total number of shares available for issuance under the Amended Equity Plan: (A) the payment in cash of dividends;cumulative preferred dividends, undeclared and (B) any award that is settled in cash rather than by issuance of stock.unpaid.
|
| |
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information required by this item will be set forth in the Proxy Statement and is incorporated in this report by reference.
|
| |
Item 14. | Principal Accountant Fees and Services |
Note 18. Other Long-Term Liabilities
Other long-term liabilities include the following: |
| | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2019 | | 2018 |
| Long-term obligations under capital leases | | $ | (2 | ) | | $ | 58 |
|
| Derivative liabilities—noncurrent | | 1,612 |
| | 386 |
|
| Multiemployer Plan Holdback—Boyd Coffee (1) | | — |
| | 1,056 |
|
| Cumulative preferred dividends, undeclared and unpaid—noncurrent | | 618 |
| | 312 |
|
| Deferred income taxes (2) | | 1,795 |
| | — |
|
| Other long-term liabilities | | $ | 4,023 |
| | $ | 1,812 |
|
___________
(1) On January 8, 2019, Boyd Coffee notified the Company of the assessment of $0.5 million in withdrawal liability against the Seller, which the Company timely paid from the Multiemployer Plan Holdback during the three months ended March 31, 2019. The Company has applied the remaining amount of the Multiemployer Plan Holdback of $0.5 million towards satisfaction of the Seller’s post-closing net working capital deficiency under the Asset Purchase Agreement as of June 30, 2019.
(2) Represents deferred tax liabilities that have an indefinite reversal pattern.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 19. Income Taxes
The information required by this itemcurrent and deferred components of the provision for income taxes consist of the following:
|
| | | | | | | | | | | | |
| | | For the Years Ended June 30, |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Current: | | | | | | |
| Federal | | $ | (1,774 | ) | | $ | 101 |
| | $ | 132 |
|
| State | | 231 |
| | 56 |
| | 340 |
|
| Total current income tax (benefit) expense | | (1,543 | ) | | 157 |
| | 472 |
|
| Deferred: | | | | | | |
| Federal | | 30,618 |
| | 17,090 |
| | 12,120 |
|
| State | | 11,036 |
| | 65 |
| | 2,223 |
|
| Total deferred income tax expense | | 41,654 |
| | 17,155 |
| | 14,343 |
|
| Income tax expense | | $ | 40,111 |
| | $ | 17,312 |
| | $ | 14,815 |
|
A reconciliation of income tax expense to the federal statutory tax rate is as follows:
|
| | | | | | | | | | | | |
| | | For the Years Ended June 30, |
| (In thousands) | | 2019 | | 2018 |
| | 2017 |
| Statutory tax rate | | 21 | % | | 28 | % | | 35 | % |
| Income tax (benefit) expense at statutory rate | | $ | (7,032 | ) | | $ | (272 | ) | | $ | 13,078 |
|
| State income tax (benefit) expense, net of federal tax benefit | | (1,295 | ) | | 12 |
| | 1,707 |
|
| Dividend income exclusion | | — |
| | — |
| | (134 | ) |
| Valuation allowance | | 50,123 |
| | 283 |
| | (14 | ) |
| Change in tax rate | | 124 |
| | 18,022 |
| | (54 | ) |
| Retiree life insurance | | — |
| | 19 |
| | 1 |
|
| Other (net) | | (1,809 | ) | | (752 | ) | | 231 |
|
| Income tax expense | | $ | 40,111 |
| | $ | 17,312 |
| | $ | 14,815 |
|
| | | | | | | |
On December 22, 2017, the President of the United States signed into law the Tax Act. The SEC subsequently issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. Under SAB 118, companies are able to record a reasonable estimate of the impacts of the Tax Act if one is able to be determined and report it as a provisional amount during the measurement period. The measurement period is not to extend beyond one year from the enactment date. Impacts of the Tax Act that a company is not able to make a reasonable estimate for should not be recorded until a reasonable estimate can be made during the measurement period. The incremental net tax impact recorded upon completion of the analysis of the income tax effects of the U.S. tax law changes was not material to our Consolidated Condensed Financial Statements.
Pursuant to the Tax Act, the federal corporate tax rate was reduced to 21.0%, effective for the tax years beginning on or after January 1, 2018. Deferred tax amounts are calculated based on the rates at which they are expected to reverse in the future. The provisional amount recorded in fiscal 2018 relating to the re-measurement of the Company’s deferred tax balances as a result of the reduction in the corporate tax rate was $18.0 million. The Company finalized its assessment of the income tax effects of the Tax Act in the second quarter of fiscal years ended June 30, 2019.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The primary components of the temporary differences which give rise to the Company’s net deferred tax assets (liabilities) are as follows:
|
| | | | | | | | | |
| | | As of June 30, |
| (In thousands) | | 2019 | | 2018 | |
| Deferred tax assets: | | | | | |
| Postretirement benefits | | $ | 20,775 |
| | $ | 18,862 |
| |
| Accrued liabilities | | 5,042 |
| | 4,754 |
| |
| Net operating loss carryforwards | | 37,768 |
| | 32,552 |
| |
| Other | | 5,950 |
| | 6,728 |
| |
| Total deferred tax assets | | 69,535 |
| | 62,896 |
| |
| Deferred tax liabilities: | | | | | |
| Fixed assets | | (15,562 | ) | | (16,156 | ) | |
| Other | | (3,749 | ) | | (5,536 | ) | |
| Total deferred tax liabilities | | (19,311 | ) | | (21,692 | ) | |
| Valuation allowance | | (52,019 | ) | | (1,896 | ) | |
| Net deferred tax assets (liabilities) | | $ | (1,795 | ) | | $ | 39,308 |
| |
As a result of adopting ASU 2016-09 in fiscal 2018 on a modified retrospective basis, with a cumulative effect adjustment to opening retained earnings, the table of deferred tax assets and liabilities shown above includes deferred tax assets at June 30, 2017 that arose directly from tax deductions related to equity compensation in excess of compensation recognized for financial reporting.
At June 30, 2019, the Company had approximately $146.8 million in federal and $113.4 million in state net operating loss carryforwards that will expire from June 30, 2020 to June 30, 2030. Additionally, at June 30, 2019, the Company had $0.8 million of federal business tax credits that will expire from June 30, 2025 to June 30, 2038 and approximately $1.7 million of federal alternative minimum tax credits that do not expire, and of which $0.8 million is currently refundable.
At June 30, 2019, the Company had total deferred tax assets of $69.5 million and net deferred tax assets of $50.2 million before valuation allowance of $52.0 million. In assessing if the deferred tax assets will be set forthrealized, the Company considers whether it is probable that some or all of the deferred tax assets will not be realized. In determining whether the deferred taxes are realizable, the Company considers the period of expiration of the tax asset, historical and projected taxable income, and tax liabilities for the tax jurisdiction in which the tax asset is located. Valuation allowances are provided to reduce the amounts of deferred tax assets to an amount that is more likely than not to be realized based on an assessment of positive and negative evidence, including estimates of future taxable income necessary to realize future deductible amounts.
For the years ended June 30, 2019, 2018 and 2017, due to recent cumulative losses, the Company conclude that certain federal and state net operating loss carry forwards and tax credit carryovers will not be utilized before expiration. The amounts of valuation allowance recorded in the Proxy StatementConsolidated Balance Sheets were $52.0 million, $1.9 million and $1.6 million to reduce deferred tax assets in fiscal 2019, 2018 and 2017, respectively. The Company's valuation allowance increased in fiscal 2019 and 2018 by $50.1 million and $0.3 million, respectively.
As of, and for the three years ended June 30, 2019, 2018 and 2017, the Company had no significant uncertain tax positions.
The Company files income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. The Company is no longer subject to U.S. income tax examinations for the fiscal years prior to June 30, 2016. Although the outcome of tax audits is always uncertain, the Company does not believe the outcome of any future audit will have a material adverse effect on the Company’s consolidated financial statements.
The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. There were no amount of interest and penalties recognized in the Consolidated Balance Sheets in the fiscal years ended June 30, 2019 and 2018, associated with uncertain tax positions. Additionally, the Company did not record any income tax expense related to interest and penalties on uncertain tax positions in the fiscal years ended June 30, 2019, 2018 and 2017, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 20. Net (Loss) Income Per Common Share
Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to the Company by the weighted average number of common shares outstanding during the periods presented. Diluted net income (loss) per common share is calculated by dividing diluted net income (loss) attributable to the Company by the weighted average number of common shares outstanding adjusted to include the effect, if dilutive, of the exercise of in-the-money stock options, unvested restricted stock, performance-based restricted stock units, and shares of Series A Preferred Stock, as converted, during the periods presented.
The following table presents the computation of basic and diluted earnings per common share:
|
| | | | | | | | | | | | |
| | | For the Years Ended June 30, |
| (In thousands, except share and per share amounts) | | 2019 | | 2018 | | 2017 |
| Undistributed net (loss) income available to common stockholders | | $ | (74,054 | ) | | $ | (18,652 | ) | | $ | 22,524 |
|
| Undistributed net (loss) income available to nonvested restricted stockholders and holders of convertible preferred stock | | (76 | ) | | (17 | ) | | 27 |
|
| Net (loss) income available to common stockholders—basic | | $ | (74,130 | ) | | $ | (18,669 | ) | | $ | 22,551 |
|
| | | | | | | |
| Weighted average common shares outstanding—basic | | 16,996,354 |
| | 16,815,020 |
| | 16,668,745 |
|
| Effect of dilutive securities: | | | | | | |
| Shares issuable under stock options | | — |
| | — |
| | 117,007 |
|
| Weighted average common shares outstanding—diluted | | 16,996,354 |
| | 16,815,020 |
| | 16,785,752 |
|
| Net (loss) income per common share available to common stockholders—basic | | $ | (4.36 | ) | | $ | (1.11 | ) | | $ | 1.35 |
|
| Net (loss) income per common share available to common stockholders—diluted | | $ | (4.36 | ) | | $ | (1.11 | ) | | $ | 1.34 |
|
The following table summarizes anti-dilutive securities excluded from the computation of diluted net income (loss) per common share for the periods indicated:
|
| | | | | | | | | |
| | | For the Years Ended June 30, |
| (In thousands) | | 2019 | | 2018 | | 2017 |
| Shares issuable under stock options | | — |
| | 462,032 |
| | 24,671 |
|
| Shares issuable under convertible preferred stock | | 407,734 |
| | 393,769 |
| | — |
|
| Shares issuable under PBRSUs | | — |
| | 35,732 |
| | — |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 21. Preferred Stock
The Company is authorized to issue 500,000 shares of preferred stock at a par value of $1.00, including 21,000 authorized shares of Series A Preferred Stock.
Series A Convertible Participating Cumulative Perpetual Preferred Stock
The Series A Preferred Stock (a) pays a dividend, when, as and if declared by the Company’s Board of Directors, of 3.5% APR of the stated value per share, payable quarterly in arrears, (b) has an initial stated value of $1,000 per share, adjustable up or down by the amount of undeclared and unpaid dividends or subsequent payment of accumulated dividends thereon, respectively, and (c) has a conversion price of $38.32. Dividends may be paid in cash. The Company accrues for undeclared and unpaid dividends as they are payable in accordance with the terms of the Certificate of Designations filed with the Secretary of State of the State of Delaware. At June 30, 2019, the Company had undeclared and unpaid preferred dividends of $924,347 on 14,700 issued and outstanding shares of Series A Preferred Stock. Series A Preferred Stock is a participating security and has rights to earnings that otherwise would have been available to holders of the Company's common stock. On an as converted basis, holders of Series A Preferred Stock are entitled to vote together with the holders of the Company’s common stock and are entitled to share in the dividends on the Company's common stock, when declared. Each share of Series A Preferred Stock is convertible into the number of shares of the Company’s common stock (rounded down to the nearest whole share and subject to adjustment in accordance with the terms of the Certificate of Designations) equal to the stated value per share of Series A Preferred Stock divided by the conversion price of $38.32. Series A Preferred Stock is a perpetual stock and is incorporated in this report by reference.not redeemable at the election of the Company or any holder. Based on its characteristics, the Company classified Series A Preferred Stock as permanent equity.
At June 30, 2019, Series A Preferred Stock consisted of the following: |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| (In thousands, except share and per share amounts) | | | | | | |
| Shares Authorized | | Shares Issued and Outstanding | | Stated Value per Share | | Carrying Value | | Cumulative Preferred Dividends, Undeclared and Unpaid | | Liquidation Preference |
| 21,000 |
| | 14,700 |
| | $ | 1,063 |
| | 15,624 |
| | $ | 924 |
| | $ | 15,624 |
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 22. Commitments and Contingencies
Operating Leases
The Company leases buildings, machinery and equipment, computer hardware and furniture and fixtures. All contractual increases and rent-free periods included in the lease contract are taken into account when calculating the minimum lease payment and are recognized on a straight-line basis over the lease term. Certain leases have renewal periods which are not included in the table below. The leases expire in various years ranging from 2020 to 2028.
Rent expenses paid for the fiscal years ended June 30, 2019, 2018 and 2017 were $6.4 million, $5.5 million and $5.1 million, respectively.
The minimum annual payments under operating leases are as follows:
|
| | | | |
| (In thousands) | | Operating
Lease
Obligations |
| Year Ended June 30, | | |
| 2020 | | $ | 4,434 |
|
| 2021 | | 3,238 |
|
| 2022 | | 2,472 |
|
| 2023 | | 2,131 |
|
| 2024 | | 2,025 |
|
| Thereafter | | 4,389 |
|
| Total | | $ | 18,689 |
|
Capital Leases
|
| | | | |
| (In thousands) | | Capital
Lease
Obligations |
| Year Ended June 30, | | |
| 2020 | | $ | 36 |
|
| 2021 | | 1 |
|
| Total minimum lease payments | | 37 |
|
Less: imputed interest
(0.82% to 10.66%) | | (2 | ) |
| Present value of future minimum lease payments | | 35 |
|
| Less: current portion | | 34 |
|
| Long-term capital lease obligations | | $ | 1 |
|
Purchase Commitments
As of June 30, 2019, the Company had committed to purchase green coffee inventory totaling $48.6 million under fixed-price contracts, $9.4 million in other inventory under non-cancelable purchase orders and $3.3 million in other purchases under non-cancelable purchase orders.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Legal Proceedings
Council for Education and Research on Toxics (“CERT”) v. Brad Berry Company Ltd., et al., Superior Court of the State of California, County of Los Angeles
On August 31, 2012, CERT filed an amendment to a private enforcement action adding a number of companies as defendants, the Company’s subsidiary, Coffee Bean International, Inc., which sell coffee in California under the State of California's Safe Drinking Water and Toxic Enforcement Act of 1986, also known as Proposition 65. The suit alleges that the defendants have failed to issue clear and reasonable warnings in accordance with Proposition 65 that the coffee they produce, distribute, and sell contains acrylamide. This lawsuit was filed in Los Angeles Superior Court (the “Court”). CERT has demanded that the alleged violators remove acrylamide from their coffee or provide Proposition 65 warnings on their products and pay $2,500 per day for each and every violation while they are in violation of Proposition 65.
Acrylamide is produced naturally in connection with the heating of many foods, especially starchy foods, and is believed to be caused by the Maillard reaction, though it has also been found in unheated foods such as olives. With respect to coffee, acrylamide is produced when coffee beans are heated during the roasting process-it is the roasting itself that produces the acrylamide. While there has been a significant amount of research concerning proposals for treatments and other processes aimed at reducing acrylamide content of different types of foods, to our knowledge there is currently no known strategy for reducing acrylamide in coffee without negatively impacting the sensorial properties of the product.
The Company has joined a Joint Defense Group, or JDG, and, along with the other co-defendants, has answered the complaint, denying, generally, the allegations of the complaint, including the claimed violation of Proposition 65 and further denying CERT’s right to any relief or damages, including the right to require a warning on products. The Joint Defense Group contends that based on proper scientific analysis and proper application of the standards set forth in Proposition 65, exposures to acrylamide from the coffee products pose no significant risk of cancer and, thus, these exposures are exempt from Proposition 65’s warning requirement.
The JDG filed a pleading responding to claims and asserting affirmative defenses on January 22, 2013. The Court initially limited discovery to the four largest defendants, so the Company was not initially required to participate in discovery. The Court decided to handle the trial in two “phases,” and the “no significant risk level” defense, the First Amendment defense, and the federal preemption defense were tried in the first phase. Trial commenced on September 8, 2014, and testimony completed on November 4, 2014, for the three “Phase 1” defenses.
Following final trial briefing, the Court heard, on April 9, 2015, final arguments on the Phase 1 issues. On September 1, 2015, the Court ruled against the JDG on the Phase 1 affirmative defenses. The JDG received permission to file an interlocutory appeal, which was filed by writ petition on October 14, 2015. On January 14, 2016, the Court of Appeals denied the JDG’s writ petition thereby denying the interlocutory appeal so that the case stays with the trial court.
On February 16, 2016, the Plaintiff filed a motion for summary adjudication arguing that based upon facts that had been stipulated by the JDG, the Plaintiff had proven its prima facie case and all that remains is a determination of whether any affirmative defenses are available to Defendants. On March 16, 2016, the Court reinstated the stay on discovery for all parties except for the four largest defendants. Following a hearing on April 20, 2016, the Court granted Plaintiff’s motion for summary adjudication on its prima facie case. Plaintiff filed its motion for summary adjudication of affirmatives defenses on May 16, 2016. At the August 19, 2016 hearing on Plaintiff’s motion for summary adjudication (and the JDG’s opposition), the Court denied Plaintiff’s motion, thus maintaining the ability of the JDG to defend the issues at trial. On October 7, 2016, the Court continued the Plaintiff’s motion for preliminary injunction until the trial for Phase 2.
In November 2016, the parties pursued mediation, but were not able to resolve the dispute.
In December 2016, discovery resumed for all defendants. Depositions of “person most knowledgeable” witnesses for each defendant in the JDG commenced in late December and proceeded through early 2017, followed by new interrogatories served upon the defendants. The Court set a fact and discovery cutoff of May 31, 2017 and an expert discovery cutoff of August 4, 2017. Depositions of expert witnesses were completed by the end of July 2017. On July 6, 2017, the Court held hearings on a number of discovery motions and denied Plaintiff’s motion for sanctions as to all the defendants.
At a final case management conference on August 21, 2017 the Court set August 31, 2017 as the new trial date for Phase 2, though later changed the starting date for trial to September 5, 2017. The Court elected to break up trial for Phase 2 into two
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
segments, the first focused on liability and the second on remedies. After 14 days at trial, both sides rested on the liability segment, and the Court set a date of November 21, 2017 for the hearing for all evidentiary issues related to this liability segment. The Court also set deadlines for evidentiary motions, issues for oral argument, and oppositions to motions. This hearing date was subsequently moved to January 19, 2018.
On March 28, 2018, the Court issued a proposed statement of decision in favor of Plaintiff. Following evaluation of the parties' objections to the proposed statement of decision, the Court issued its final statement of decision on May 7, 2018 which was substantively similar to the proposed statement from March 2018. The issuance of a final statement of decision does not itself cause or order any remedy, such as any requirement to use a warning notice. Any such remedy, including any monetary damages or fee awards, would be resolved in Phase 3 of the trial.
On June 15, 2018, California’s Office of Environmental Health Hazard Assessment (OEHHA) announced its proposal of a regulation that would establish, for the purposes of Proposition 65, that chemicals present in coffee as a result of roasting or brewing pose no significant risk of cancer. If adopted, the regulation would, among other things, mean that Proposition 65 warnings would generally not be required for coffee. Plaintiff had earlier filed a motion for permanent injunction, prior to OEHHA’s announcement, asking that the Court issue an order requiring defendants to provide cancer warnings for coffee or remove the coffee products from store shelves in California. The JDG petitioned the Court to (1) renew and reconsider the JDG’s First Amendment defense from Phase 1 based on a recent U.S. Supreme Court decision in a First Amendment case that was decided in the context of Proposition 65; (2) vacate the July 31, 2018 hearing date and briefing schedule for Plaintiff’s permanent injunction motion; and (3) stay all further proceedings pending the conclusion of the rulemaking process for OEHHA’s proposed regulation. On June 25, 2018, the Court denied the JDG’s motion to vacate the hearing on Plaintiff’s motion for permanent injunction and added the motion to stay to the July 31, 2018 docket to be heard. At the July 31st hearing, the Court granted the JDG’s application and agreed to continue the hearing on all motions to September 6, 2018.
At the September 6, 2018 hearing, the Court denied the JDG’s First Amendment motion, and denied the motion to stay pending conclusion of OEHHA’s rulemaking process. The Plaintiff agreed to have the permanent injunction motion continued until after the remedies phase of the trial. The Court set the “Phase 3” remedies trial phase to begin on October 15, 2018.
On September 20, 2018, the JDG filed a writ petition with the California Court of Appeals, Second Appellate District, to set aside the lower court’s order denying the JDG’s motion to renew or reopen its First Amendment defense to the imposition of a cancer warning for their coffee products, or, alternatively, to set aside its order dated September 6, 2018, denying the JDG’s motion to stay this action pending adoption by the OEHHA of the proposed regulation. On October 12, 2018, the Court of Appeals issued a Temporary Stay Order. The Temporary Stay Order ordered the Phase 3 remedies trial be stayed until further notice and did not address the JDG’s First Amendment defense petition. The Court of Appeals also required the JDG to provide a written status update by January 15, 2019. Following the issuance of the Court of Appeal’s Temporary Stay Order, on October 15, 2018, the trial court issued a Notice of Court’s Ruling staying any further proceedings, including both remedies and liability, pending a ruling by the Court of Appeals.
At a December 3, 2018 status conference, the Court continued its stay on the Phase 3 remedies trial. The Court set another status conference for February 4, 2019 and asked that the JDG submit a joint status report on appellate activities by January 28, 2019.
The JDG provided their written status update to the Court of Appeals timely on January 15, 2019, which update reported that OEHHA had submitted the final regulation (unchanged from its proposed rulemaking) to the California Office of Administrative Law (OAL) for review. OAL had 30 working days (until February 19, 2019) to approve, reject, or submit questions to OEHHA concerning the regulation. On January 31, 2019, the Court of Appeals continued its Temporary Stay Order and required the JDG to provide a written update by April 15, 2019.
Prior to February 19, 2019, OAL raised questions to OEHHA concerning the regulation, specifically OEHHA’s authority to make a determination for chemicals in coffee whether or not presently listed under Prop 65. As a result, OEHHA decided to take back the regulation from OAL to address those issues. On March 15, 2019, OEHHA announced that it was amending the language of the regulation to make clear that the “no significant risk” determination applies only to chemicals in coffee that were listed under Prop 65 on or before March 15, 2019. OEHHA extended the public comment period until April 2, 2019. On April 23, 2019, OEHHA resubmitted the amended regulation and the supplemented version of the final statement of reasons to OAL. OAL had 30 working days - or until June 5 - to reject the regulation or approve and submit it to the Secretary of State for inclusion in the next version of the California Code of Regulations, which is updated quarterly. On June 3, 2019, OAL
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
approved the amended regulation and submitted it to the Secretary of State, which means that it will take effect on October 1, 2019. The stay orders have since been lifted by the courts and the JDG is working through the effects of the amended regulation on this matter.
At this time, the Company is not able to predict the probability of the outcome or estimate of loss, if any, related to this matter.
The Company is a party to various other pending legal and administrative proceedings. It is management’s opinion that the outcome of such proceedings will not have a material impact on the Company’s financial position, results of operations, or cash flows.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 23. Revenue Recognition
On July 1, 2018, the Company adopted ASU 2014-09, using the modified retrospective method for all contracts not completed as of the date of adoption. Adoption of ASU 2014-09 did not have a material effect on the results of operations, financial position or cash flows of the Company. See Note 2. The Company’s primary sources of revenue are sales of coffee, tea and culinary products. The Company recognizes revenue when control of the promised good or service is transferred to the customer and in amounts that the Company expects to collect. The timing of revenue recognition takes into consideration the various shipping terms applicable to the Company’s sales.
The Company delivers products to customers primarily through two methods, DSD to the Company’s customers at their place of business and direct ship from the Company’s warehouse to the customer’s warehouse or facility. Each delivery or shipment made to a third party customer is to satisfy a performance obligation. Performance obligations generally occur at a point in time and are satisfied when control of the goods passes to the customer. The Company is entitled to collection of the sales price under normal credit terms in the regions in which it operates.
ASC Topic 606, “Revenue from Contracts with Customers” (“ASC Topic 606”), provides certain practical expedients in order to ease the burden of implementation. The Company elected to apply the practical expedient related to applying the guidance to a portfolio of contracts with similar characteristics as the Company does not expect the effects on its consolidated financial statements to differ materially from applying the guidance to the individual contracts within that portfolio. For customers that have executed substantially similar contracts, including the ones utilizing our standard forms, the Company believes that evaluation of these contracts on an individual basis would not result in a material difference. Therefore, the Company has adopted the practical expedient and applied one accounting treatment to all such contracts.
In accordance with ASC Topic 606, the Company disaggregates net sales from contracts with customers based on the characteristics of the products sold:
|
| | | | | | | | | | | | | | | | | | | | | |
| | | For the Years Ended June 30, |
| | | 2019 | | 2018 | | 2017 |
| (In thousands) | | $ | | % of total | | $ | | % of total | | $ | | % of total |
| Net Sales by Product Category: | | | | | | | | | | | | |
| Coffee (Roasted) | | $ | 378,583 |
| | 63.5 | % | | $ | 379,951 |
| | 62.6 | % | | $ | 339,358 |
| | 62.7 | % |
| Coffee (Frozen Liquid) | | 34,541 |
| | 5.8 | % | | 34,794 |
| | 5.7 | % | | 32,827 |
| | 6.1 | % |
| Tea (Iced & Hot) | | 33,109 |
| | 5.6 | % | | 32,477 |
| | 5.4 | % | | 29,256 |
| | 5.4 | % |
| Culinary | | 64,100 |
| | 10.8 | % | | 64,432 |
| | 10.6 | % | | 55,592 |
| | 10.3 | % |
| Spice | | 24,101 |
| | 4.0 | % | | 25,150 |
| | 4.2 | % | | 24,895 |
| | 4.6 | % |
| Other beverages(1) | | 58,367 |
| | 9.8 | % | | 66,699 |
| | 11.0 | % | | 56,653 |
| | 10.4 | % |
| Net sales by product category | | 592,801 |
| | 99.5 | % | | 603,503 |
| | 99.5 | % | | 538,581 |
| | 99.5 | % |
| Fuel surcharge | | 3,141 |
| | 0.5 | % | | 3,041 |
| | 0.5 | % | | 2,919 |
| | 0.5 | % |
| Net sales | | $ | 595,942 |
| | 100.0 | % | | $ | 606,544 |
| | 100.0 | % | | $ | 541,500 |
| | 100.0 | % |
____________
(1) Includes all beverages other than roasted coffee, frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to drink cold brew and iced coffee.
The Company does not have any material contract assets and liabilities as of June 30, 2019. Receivables from contracts with customers are included in “Accounts receivable, net” on the Company’s condensed consolidated balance sheets. At June 30, 2019, 2018 and 2017, “Accounts receivable, net” included, $53.6 million, $54.5 million and $44.5 million, respectively, in receivables from contracts with customers.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 24. Selected Quarterly Financial Data (Unaudited)
The following tables set forth certain unaudited quarterly information for each of the eight fiscal quarters in the two year period ended June 30, 2019. This quarterly information has been prepared on a consistent basis with the audited consolidated financial statements and, in the opinion of management, includes all adjustments which management believes are necessary for a fair presentation of the information for the periods presented. All prior period amounts have been retrospectively adjusted to reflect the impact of the certain changes in accounting principles and corrections to previously issued financial statements.
The Company's quarterly operating results may fluctuate significantly as a result of a variety of factors, and operating results for any fiscal quarter are not necessarily indicative of results for a full fiscal year or future fiscal quarters.
|
| | | | | | | | | | | | | | | | |
| | | For The Three Months Ended |
| | | September 30,
2018 | | December 31,
2018 | | March 31,
2019 | | June 30,
2019 |
| (In thousands, except per share data) | | | | | | | | |
| Net sales | | $ | 147,440 |
| | $ | 159,773 |
| | $ | 146,679 |
| | $ | 142,050 |
|
| Cost of goods sold | | $ | 99,205 |
| | $ | 106,529 |
| | $ | 106,779 |
| | $ | 104,327 |
|
| Gross profit | | $ | 48,235 |
| | $ | 53,244 |
| | $ | 39,900 |
| | $ | 37,723 |
|
| Selling expenses | | $ | 37,310 |
| | $ | 39,591 |
| | $ | 34,422 |
| | $ | 28,324 |
|
| (Loss) income from operations | | $ | (2,078 | ) | | $ | 502 |
| | $ | (6,102 | ) | | $ | (7,024 | ) |
| Net loss | | $ | (2,986 | ) | | $ | (10,100 | ) | | $ | (51,749 | ) | | $ | (8,760 | ) |
| Net loss available to common stockholders per common share—basic | | $ | (0.18 | ) | | $ | (0.60 | ) | | $ | (3.05 | ) | | $ | (0.52 | ) |
| Net loss available to common stockholders per common share—diluted | | $ | (0.18 | ) | | $ | (0.60 | ) | | $ | (3.05 | ) | | $ | (0.52 | ) |
|
| |
Item 15. | Exhibits and Financial Statement Schedules |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For The Three Months Ended |
| | | September 30,
2017 | | December 31,
2017 | | March 31,
2018 | | June 30,
2018 |
| | | As Previously Reported | | Retrospectively Adjusted | | As Previously Reported | | Retrospectively Adjusted | | As Previously Reported | | Retrospectively Adjusted | | As Previously Reported | | Retrospectively Adjusted |
| (In thousands, except per share data) | | | | | | | | | | | | | | | | |
| Net sales | | $ | 131,713 |
| | $ | 131,713 |
| | $ | 167,366 |
| | $ | 167,366 |
| | $ | 157,927 |
| | $ | 157,927 |
| | $ | 149,538 |
| | $ | 149,538 |
|
| Cost of goods sold | | $ | 85,672 |
| | $ | 85,630 |
| | $ | 111,175 |
| | $ | 111,089 |
| | $ | 105,716 |
| | $ | 105,629 |
| | $ | 96,939 |
| | $ | 96,806 |
|
| Gross profit | | $ | 46,041 |
| | $ | 46,083 |
| | $ | 56,191 |
| | $ | 56,277 |
| | $ | 52,211 |
| | $ | 52,298 |
| | $ | 52,599 |
| | $ | 52,732 |
|
| Selling expenses | | $ | 32,828 |
| | $ | 32,856 |
| | $ | 42,414 |
| | $ | 42,127 |
| | $ | 38,041 |
| | $ | 37,754 |
| | $ | 41,256 |
| | $ | 40,655 |
|
| Income from operations | | $ | 1,862 |
| | $ | 1,845 |
| | $ | 28 |
| | $ | 10 |
| | $ | (2,767 | ) | | $ | (2,785 | ) | | $ | 2,001 |
| | $ | 1,984 |
|
| Net income (loss) | | $ | 840 |
| | $ | 841 |
| | $ | (17,060 | ) | | $ | (17,060 | ) | | $ | (2,193 | ) | | $ | (2,193 | ) | | $ | 133 |
| | $ | 133 |
|
| Net income (loss) available to common stockholders per common share—basic | | $ | 0.05 |
| | $ | 0.05 |
| | $ | (1.03 | ) | | $ | (1.03 | ) | | $ | (0.14 | ) | | $ | (0.14 | ) | | $ | — |
| | $ | — |
|
| Net income (loss) available to common stockholders per common share—diluted | | $ | 0.05 |
| | $ | 0.05 |
| | $ | (1.03 | ) | | $ | (1.03 | ) | | $ | (0.14 | ) | | $ | (0.14 | ) | | $ | — |
| | $ | — |
|
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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, 2016 and 2015 |
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Consolidated Statements of Operations for the Years Ended June 30, 2016, 2015 and 2014 |
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Consolidated Statements of Comprehensive Income (Loss) for the Years Ended June 30, 2016, 2015 and 2014 |
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Consolidated Statements of Cash Flows for the Years Ended June 30, 2016, 2015 and 2014 |
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Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2016, 2015 and 2014 |
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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 the 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 the Annual Report on Form 10-K. Each management contract or compensation plan required to be filed as an exhibit is identified by an asterisk (*).
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(b) | Exhibits: See Exhibit Index. |
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
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Item 16. | Form 10-K Summary |
Note 25. Subsequent Events
The Company evaluated all events or transactions that occurred after June 30, 2019 through the date the consolidated financial statements were issued. During this period the Company had the following material subsequent events that require disclosure:
None.Sale of Office Coffee Assets
In order to focus on its core product offerings, in July 2019, the Company completed the sale of certain assets associated with its office coffee customers for $9.3 million in cash paid at the time of closing plus an earnout of up to an additional $2.3 million if revenue expectations are achieved during test periods scheduled to occur at various branches at various times and concluding by early third quarter of fiscal ended 2020.
Sale of Seattle Office Branch Property
SIGNATURESOn August 28, 2019, the Company completed the sale of its branch property in Seattle, Washington state for a gross sale price of $7.9 million.
Sale leaseback of Houston Facility
On September 6, 2019, the Company signed a purchase and sale agreement (the “PSA”) for the sale of its Houston, Texas manufacturing facility and warehouse (the “Property”) for an aggregate purchase price, exclusive of closing costs, of $10.0 million. Pursuant to the requirements of Section 13 or 15(d)PSA and upon the closing of the Securities Exchange Actsale of 1934, the registrant has duly causedProperty, the Company and the purchaser have agreed to enter into a three year leaseback agreement with respect to the Property. The Company may terminate the leaseback no earlier than the first day of the eighteenth full calendar month of the term providing at least nine months’ notice. There is no assurance at this reporttime that the purchaser will in fact purchase any or all of the Property. The closing of the sale of the Property, which is subject to be signedcustomary diligence and closing conditions, is expected to occur on or around November 20, 2019. The purchaser does not have any material relationship with the Company or its behalfsubsidiaries, other than through the PSA and Leaseback.
In connection with the sale leaseback contemplated by the undersigned, thereunto duly authorized.
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| FARMER BROS. CO.
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| By: | | /s/Michael H. Keown |
| | | Michael H. Keown
President and Chief Executive Officer
(chief executive officer)
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| | | September 13, 2016 |
| By: | | /s/Isaac N. Johnston, Jr. |
| | | Isaac N. Johnston, Jr.
Treasurer and Chief Financial Officer
(principal financial and accounting officer)
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| | | September 13, 2016 |
PursuantPSA, on September 6, 2019, the Company made a clarifying amendment to its amended and restated credit agreement originally dated as of November 6, 2018, to make clear that any sale and leaseback already permitted under the requirements ofasset sale covenant would not be inadvertently prohibited under the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrantsale and in the capacities and on the dates indicated.
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/s/ Randy E. Clark | | Chairman of the Board and Director | | September 13, 2016 |
Randy E. Clark | | | | |
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/s/ Guenter W. Berger | | Chairman Emeritus and Director | | September 13, 2016 |
Guenter W. Berger | | | | |
| | | | |
/s/ Hamideh Assadi | | Director | | September 13, 2016 |
Hamideh Assadi | | | | |
| | | | |
| | Director | | |
Jeanne Farmer Grossman | | | | |
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/s/ Michael H. Keown | | Director | | September 13, 2016 |
Michael H. Keown | | | | |
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/s/ Charles F. Marcy | | Director | | September 13, 2016 |
Charles F. Marcy | | | | |
| | | | |
/s/ Christopher P. Mottern | | Director | | September 13, 2016 |
Christopher P. Mottern | | | | |
EXHIBIT INDEX
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2.1 | | Asset Purchase Agreement, dated as of November 16, 2015, by and between Farmer Bros. Co. and Harris Spice Company Inc. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 30, 2015 and incorporated herein by reference).* |
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3.1 | | Certificate of Incorporation (filed as Exhibit 3.1 to the Company's Annual Report on Form 10-K filed with the SEC on September 16, 2014 and incorporated herein by reference).
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3.2 | | Amended and Restated Bylaws (filed as Exhibit 3.2 to the Company’s Quarterly on Form 10-Q filed with the SEC on May 6, 2016 and incorporated herein by reference). |
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3.3 | | Certificate of Elimination (filed as Exhibit 3.3 to the Company's Registration Statement on Form 8-A/A filed with the SEC on September 24, 2015 and incorporated herein by reference).
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4.1 | | Specimen Stock Certificate (filed as Exhibit 4.1 to the Company's Registration Statement on Form 8-A/A filed with the SEC on September 24, 2015 and incorporated herein by reference)
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4.2 | | Registration Rights Agreement, dated as of June 16, 2016, among Farmer Bros. Co. and the Investors identified on the signature pages thereto (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 21, 2016 and incorporated herein by reference).
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10.1 | | Credit Agreement, dated as of March 2, 2015, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K for the period ended March 6, 2015 and incorporated herein by reference).
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10.2 | | Pledge and Security Agreement, dated as of March 2, 2015, by and among Farmer Bros. Co., Coffee Bean International, Inc., FBC Finance Company, Coffee Bean Holding Co., Inc. and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K for the period ended March 6, 2015 and incorporated herein by reference).
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10.3 | | Farmer Bros. Co. Pension Plan for Salaried Employees (filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 filed with the SEC on November 5, 2012 and incorporated herein by reference).** |
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10.4 | | Amendment No. 1 to Farmer Bros. Co. Retirement Plan effective June 30, 2011 (filed herewith).** |
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10.5 | | Action of the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement Plans amending the Farmer Bros. Co. Retirement Plan, effective as of December 6, 2012 (filed as Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 filed with the SEC on May 6, 2013 and incorporated herein by reference).** |
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10.6 | | Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2013 filed with the SEC on February 10, 2014 and incorporated herein by reference).** |
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10.7 | | Amendment to 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 December 10, 2014 and incorporated herein by reference).** |
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10.8 | | 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 10.8 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 6, 2016 and incorporated herein by reference).** |
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10.9 | | 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 as Exhibit 10.7 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012 filed with the SEC on September 7, 2012 and incorporated herein by reference).* |
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10.10 | | 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, 2015 (filed as Exhibit 10.10 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 filed with the SEC on November 9, 2015 and incorporated herein by reference).** |
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10.11 | | 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, 2015 ((filed as Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2015 filed with the SEC on November 9, 2015 and incorporated herein by reference).** |
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10.12 | | 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 10.12 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 6, 2016 and incorporated herein by reference).
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10.13 | | 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 10.13 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 6, 2016 and incorporated herein by reference). |
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10.14 | | 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 10.14 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 6, 2016 and incorporated herein by reference). |
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10.15 | | 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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10.16 | | Employment Agreement, dated as of April 1, 2013, by and between Farmer Bros. Co. and Mark J. Nelson (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2013 and incorporated herein by reference).** |
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10.17 | | Amendment No. 1 to Employment Agreement, dated as of January 1, 2014, by and between Farmer Bros. Co. and Mark J. Nelson (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on March 5, 2014 and incorporated herein by reference).** |
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10.18 | | Amendment No. 2 to Employment Agreement, dated as of November 23, 2015, between Farmer Bros. Co. and Mark J. Nelson (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 30, 2015 and incorporated herein by reference).** |
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10.19 | | Employment Agreement, dated as of December 2, 2014, by and between Farmer Bros. Co. and Barry C. Fischetto (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on December 5, 2014 and incorporated herein by reference).** |
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10.20 | | Employment Agreement, effective as of May 27, 2015, by and between Farmer Bros. Co. and Scott W. Bixby (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on May 20, 2015 and incorporated herein by reference).** |
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10.21 | | Employment Agreement, effective as of August 6, 2015, by and between Farmer Bros. Co. and Thomas J. Mattei, Jr. (filed as Exhibit 10.20 to the Company’s Annual Report on Form 10-K filed with the SEC on September 14, 2015 and incorporated herein by reference).**
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10.22 | | Separation Agreement, dated as of July 16, 2014, by and between Farmer Bros. Co. and Mark A. Harding (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on July 17, 2014 and incorporated herein by reference).** |
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10.23 | | Farmer Bros. Co. 2007 Omnibus Plan, as amended (as approved by the stockholders at the 2012 Annual Meeting of Stockholders on December 6, 2012) (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on December 12, 2012 and incorporated herein by reference).** |
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10.24 | | Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (as approved by the stockholders at the 2013 Annual Meeting of Stockholders on December 5, 2013) (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on December 11, 2013 and incorporated herein by reference).** |
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10.25 | | Addendum to Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (filed as Exhibit 10.30 to the Company's Quarterly Report on Form 10-Q filed with the SEC on February 9, 2015 and incorporated herein by reference).** |
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10.26 | | Form of Farmer Bros. Co. 2007 Omnibus Plan Stock Option Grant Notice and Stock Option Agreement (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 4, 2013 and incorporated herein by reference).** |
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10.27 | | Stock Ownership Guidelines for Directors and Executive Officers (filed herewith).** |
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10.28 | | Form of Award Letter (Fiscal 2014) 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 17, 2014 and incorporated herein by reference).** |
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10.29 | | Form of Target Award Notification Letter (Fiscal 2015) under Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on September 17, 2014 and incorporated herein by reference).**
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10.30 | | 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 filed with the SEC on September 29, 2015 and incorporated herein by reference).** |
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10.31 | | Form of Indemnification Agreement for Directors and Officers of the Company, as adopted on December 5, 2013 (with schedule of indemnitees attached) (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on September 29, 2015 and incorporated herein by reference).** |
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10.32 | | Lease Agreement, dated as of July 17, 2015, by and between Farmer Bros. Co. as Tenant, and WF-FB NLTX, LLC as Landlord (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on July 23, 2015 and incorporated herein by reference). |
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10.33 | | First Amendment to Lease Agreement dated as of December 29, 2015, by and between Farmer Bros. Co. as Tenant, and WF-FB NLTX, LLC as Landlord (filed as Exhibit 10.36 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 6, 2016 and incorporated herein by reference). |
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10.34 | | Amendment No. 2 to Lease Agreement dated as of March 10, 2016, by and between Farmer Bros. Co. as Tenant, and WF-FB NLTX, LLC as Landlord (filed as Exhibit 10.37 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 6, 2016 and incorporated herein by reference). |
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10.35 | | Development Management Agreement dated as of July 17, 2015, by and between Farmer Bros. Co., as Tenant and Stream Realty Partners-DFW, L.P., as Developer (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on July 23, 2015 and incorporated herein by reference). |
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10.36 | | First Amendment to Development Management Agreement dated as of January 1, 2016, by and between Farmer Bros. Co., as Tenant and Stream Realty Partners-DFW, L.P., as Developer (filed as Exhibit 10.39 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 6, 2016 and incorporated herein by reference). |
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10.37 | | Second Amendment to Development Management Agreement dated as of March 25, 2016, by and between Farmer Bros. Co., as Tenant and Stream Realty Partners-DFW, L.P., as Developer (filed as Exhibit 10.40 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 6, 2016 and incorporated herein by reference).
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10.38 | | Agreement of Purchase and Sale and Joint Escrow Instructions, dated as of April 11, 2016, by and between Farmer Bros. Co. as Seller, and Bridge Acquisition, LLC as Buyer (filed as Exhibit 10.41 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on May 6, 2016 and incorporated herein by reference). |
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10.39 | | First Amendment to Agreement of Purchase and Sale and Joint Escrow Instructions, dated as of June 1, 2016, by and between Farmer Bros. Co. and Bridge Acquisition, LLC (filed herewith).
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14.1 | | Farmer Bros. Co. Code of Conduct and Ethics adopted on August 26, 2010 and updated February 2013 and September 7, 2016 (filed herewith). |
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21.1 | | List of all Subsidiaries of Farmer Bros. Co. (filed herewith) |
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23.1 | | Consent of Deloitte & Touche LLP, Independent Registered Public 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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101 | | The following financial statements from the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2016, 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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* | Pursuant to Item 601(b)(2) of Regulation S-K, the schedules and/or exhibits to this agreement have been omitted. The Registrant undertakes to supplementally furnish copies of the omitted schedules and/or exhibits to the Securities and Exchange Commission upon request. |
** | Management contract or compensatory plan or arrangement. |
leaseback covenant.
106
