Critical Accounting Policies and Estimates

~~Management’s discussion and analysis of financial condition and results of operations is based upon~~We prepare our consolidated financial statements ~~which have been prepared~~ in accordance with GAAP. ~~Our significant~~In applying many of these accounting principles, we need to make assumptions, estimates or judgments that affect the reported amounts of assets, liabilities, revenues and expenses in our consolidated financial statements. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual results may differ from our assumptions and estimates. If actual amounts are ultimately different from our estimates, the revisions are included in our results of operations for the period in which the actual amounts become known. We believe the following critical accounting policies ~~are discussed in~~could potentially produce materially different results if we were to change the underlying assumptions, estimates or judgments. See Note 2, Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements included in ~~Part II, Item 8 of~~ this report. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to inventory valuation, including LIFO reserves, valuation of goodwill and intangible assets, deferred tax assets, liabilities relating to retirement benefits, liabilities resulting from self-insurance, tax liabilities and litigation. We base our estimates, judgments and assumptionsAnnual Report on ~~historical experience and other relevant factors that are believed to be reasonable based on information available to us at the time these estimates are made.~~

~~While we believe that the historical experience and other factors considered provide~~Form 10‑K for a meaningful basis for the accounting policies applied in the preparation of the consolidated financial statements, actual results may differ from these estimates, which could require us to make adjustments to these estimates in future periods.

We believe that the estimates, judgments and assumptions involved in the accounting policies described below require the most subjective judgment and have the greatest potential impact on our financial statements, so we consider these to be our critical accounting policies. Our senior management has reviewed the development and selection of these critical accounting policies and estimates, and their related disclosure in this report, with the Audit Committeesummary 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“) 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, ~~2017~~2019 and ~~2016,~~2018, we had ~~35.2~~48.2 million and ~~34.0~~43.5 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, ~~2017,~~2019, approximately ~~94%~~87% of our outstanding coffee-related derivative instruments, representing ~~33.0~~42.1 million pounds of forecasted green coffee purchases, were designated as cash flow hedges. At June 30, ~~2016,~~2018, approximately ~~96%~~94% of our outstanding coffee-related derivative instruments, representing ~~32.6~~40.9 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 ~~limited~~interest 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 if~~debt facility. Therefore, movement in the ~~fair value of our derivative liabilities exceed~~underlying yield curves could negatively impact the amount of ~~credit granted by such counterparty, thereby reducing~~ our ~~liquidity. At June 30, 2017~~interest expense, future earnings and ~~2016, because we had a net gain position in our coffee-related derivative margin accounts, none of the~~ cash in these accounts was restricted. 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 account~~net 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 coffee~~to 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 the 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 Accounting Standards Codification (“ASC”) 350, “Intangibles-Goodwill and Other” (“ASC 350”). Goodwill and other indefinite-lived intangible assets are not amortized but instead are reviewed for impairment annually, or more frequently if an event occurs or circumstances change which indicate that an asset might be impaired. 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 compare~~more likely than not that the fair value of ~~our 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~~we 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 value~~amount of goodwill ~~which is~~and indefinite-lived intangible assets impairment as the ~~residual fair value remaining after deducting the fair value~~excess 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~~over 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 value~~consist 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 ~~names, trademarks~~name/brand name and ~~a brand name.~~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 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, ~~2017~~2019 is adequate to cover all known workers' compensation claims at June 30, ~~2017.~~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. The cost of general liability, product liability and commercial auto liability 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 plans~~account 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 the~~in 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 during~~is 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”). Effective October 1, 2016, the Company froze benefit accruals and participation in the Hourly Employees' Plan. After the plan freeze, participants do not accrue any benefits under the plan, and new hires are not eligible to participate in the plan. After the freeze the participants in the plan are eligible to receive the Company's matching contributions to their 401(k).

We obtain actuarial valuations for our single employer defined benefit pension plans. In fiscal 2017 we discounted the pension obligations using a 3.55% discount rate and 7.75% 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, 2017, the projected benefit obligation under our single employer defined benefit pension plans was $154.7 million and~~difference between the fair value of plan assets ~~was $103.4 million.~~and the benefit obligation. The ~~difference between~~adjustment 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 as~~are 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, 2017,party, we made $2.4 million in contributions to our single employer defined benefit pension plans and recorded pension expense of $1.3 million. We expect to make approximately $3.1 million in contributions to our single employer defined benefit pension plans in fiscal 2018 and accrue pension expense of approximately $1.6 million per year beginning in fiscal 2018. These pension contributions are ~~expected to increase for several years and 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 2018:

($ in thousands)
Farmer Bros. Plan Discount Rate 3.3% Actual 3.80% 4.3%
Net periodic benefit cost $ 5,638
$ 1,515
$ 4,495
Projected benefit obligation $ 155,829
$ 146,291
$ 137,686

Farmer Bros. Plan Rate of Return 6.3% Actual 6.75% 7.3%
Net periodic benefit cost $ 1,991
$ 1,515
$ 1,040

Brewmatic Plan Discount Rate 3.3% Actual 3.80% 4.3%
Net periodic benefit cost $ 36
$ 68
$ 46
Projected benefit obligation $ 4,320
$ 4,080
$ 3,863

Brewmatic Plan Rate of Return 6.3% Actual 6.75% 7.3%
Net periodic benefit cost $ 83
$ 68
$ 53

Hourly Employees’ Plan Discount Rate 3.3% Actual 3.80% 4.3%
Net periodic benefit cost $ 37
$ (4 ) $ (3 )
Projected benefit obligation $ 4,704
$ 4,329
$ 3,996

Hourly Employees' Plan Rate of Return 6.3% Actual 6.75% 7.3%
Net periodic benefit cost $ 11
$ (4 ) $ (20 )

~~Multiemployer Pension Plans~~

~~We participate in two multiemployer defined benefit pension plans that are union sponsored and collectively bargained for the benefit~~behalf of certain union employees ~~subject~~ to ~~collective bargaining agreements. We make~~multiemployer pension plans. The future contributions toand liabilities associated with these plans ~~generally based on the number~~could 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 participating~~Notes to Consolidated Financial Statements included in ~~the multiemployer plan, we may be required to pay the plan an amount based~~this 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 coverage~~Form 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 4.1% at June 30, 2017. We project an initial medical trend rate of 8.6% in fiscal 2018, ultimately reducing to 4.5% in 10 years.

~~We also provide a postretirement death benefit to certain~~further 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 4.1%. 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, we~~We 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 ~~2017~~2019 and ~~2016,~~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 have~~Our 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 ~~shares,~~PNQs or PBRSUs, and, to the extent share-based compensation expense was previously recognized for those cancelled ~~shares,~~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.



Item 7A.	Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We ~~are~~historically 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 specific~~an 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 slope~~date 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 based~~Notes to Consolidated Financial Statements included in this Annual Report on our preferred securities holdings and market yield and price relationships at June 30, 2017. 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, 2017, 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, 2017

Change in Market
Value
Interest Rate Changes
–150 basis points $ 367.5
$ (0.2 )
–100 basis points $ 367.6
$ (0.1 )
Unchanged $ 367.7
$ —
+100 basis points $ 367.6
$ (0.1 )
+150 basis points $ 367.6
$ (0.1 )

Borrowings under our Revolving Facility bear interest based on ~~average historical excess availability levels~~a 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, ~~2017,~~2019, we were eligible to borrow up to a total of $150.0 million under the Revolving Facility and had outstanding borrowings of ~~$27.6~~$92.0 million and had utilized ~~$0.1~~$2.3 million of the letters of credit ~~sublimit, and had excess availability under~~sublimit. As a result of the ~~Revolving Facility of $27.9 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, ~~2017~~2019 was ~~3.02%~~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 ~~excluding interest on letters of credit,~~ based on the weighted average interest rate on the outstanding borrowings as of June 30, ~~2017:~~2019:


($ in thousands)	Principal	Interest Rate		Annual Interest Expense		Principal	Interest Rate		Annual Interest Expense
–150 basis points	$27,621	1.52	%	$	420	$12,000	2.48	%	$	298
–100 basis points	$27,621	2.02	%	$	558	$12,000	2.98	%	$	358
Unchanged	$27,621	3.02	%	$	834	$12,000	3.98	%	$	478
+100 basis points	$27,621	4.02	%	$	1,110	$12,000	4.98	%	$	598
+150 basis points	$27,621	4.52	%	$	1,248	$12,000	5.48	%	$	658

~~Note 2. Summary of Significant Accounting Policies~~

~~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, 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. See ~~Note 9~~.

~~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.

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 10~~).

~~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 liabilities.” The Company determines the current and noncurrent classification based on the

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

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~~Item 9A.		~~Accounting Method~~
~~Normal purchases~~Controls and ~~normal sales exception~~		~~Accrual accounting~~
~~Designated in a qualifying hedging relationship~~		~~Hedge accounting~~
~~All other derivative instruments~~		~~Mark-to-market accounting~~Procedures

~~The Company enters into green coffee purchase commitments at a fixed price or at a price~~

Disclosure Controls and Procedures

Disclosure controls 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 ~~fixed (“PTF”). PTF contracts~~disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are ~~purchase commitments whereby~~required to disclose in the ~~quality, quantity, delivery period, price differential~~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, 2019, our management, with the ~~coffee “C” market price~~participation of our Chief Executive Officer and ~~other negotiated terms~~Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(e) promulgated under the Exchange Act. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2019, our disclosure controls and procedures are ~~agreed upon, but~~effective.

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 ~~date,~~Exchange Act) during our fiscal quarter ended June 30, 2019, 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 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 closesmaintaining adequate internal control over financial reporting for the ~~delivery month~~Company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and ~~may~~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 ~~fixed either at~~prevented or detected on a timely basis. Because of its 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 ~~direction~~effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the Company's internal control over financial reporting was effective as of June 30, 2019. 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 ~~vendor, or by~~Company in accordance with the ~~application~~U.S. federal securities laws and the applicable rules and regulations of the 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 ~~derivative~~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 ~~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~~our audit provides a reasonable ~~period~~basis for our opinion.

Definition and Limitations of ~~time and in~~Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the ~~conduct~~reliability 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 betweenfinancial 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~~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 ~~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~~procedures that (1) pertain to the ~~underlying risk being hedged. The Company also regularly assesses whether~~maintenance of records that, in reasonable detail, accurately and fairly reflect 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~~transactions and dispositions 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~~assets of the ~~change~~company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in ~~fair value~~accordance with generally accepted accounting principles, and that receipts and expenditures of the ~~derivative is reported as accumulated other comprehensive income (loss) (“AOCI”)~~company are being made only in accordance with authorizations of management and ~~subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. Any ineffective portion~~directors of the ~~derivative instrument's change in fair value is recognized currently in “Other, net.~~” ~~Gains~~company; and (3) provide reasonable assurance regarding prevention 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 probabletimely detection 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 gainunauthorized acquisition, use, 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, 2017 and 2016 approximately 94% and 96%, respectively,~~disposition of the ~~Company's outstanding coffee-related derivative instruments were designated as cash flow hedges. See~~ ~~Note 8~~.

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

~~Concentration of Credit Risk~~

At June 30, 2017, 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~~company’s assets that would require it to post additional collateral in support of its net derivative liability positions. At June 30, 2017 and 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. 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 2017 and 2016, the Company increased the allowance for doubtful accounts by $7,000 and $71,000, respectively. In fiscal 2015, the Company decreased the allowance for doubtful accounts by $8,000.

~~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 the 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, the Company records the expected~~material 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~~financial statements.

Because of ~~the fiscal year compared~~its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness 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 resultsfuture periods are subject to the ~~final fiscal year-end LIFO inventory valuation. See~~ ~~Note 12~~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

~~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~~Item 9B.	~~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~~Other Information

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. See ~~Note 13~~.

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

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

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 7~~.

~~Coffee Brewing Equipment and Service~~

The Company classifies certain expenses related to coffee brewing equipment provided to customers as cost of goods sold. These costs include the cost of the equipment as well as the cost of servicing that equipment (including service employees’ salaries, cost of transportation and the cost of supplies and parts) and are considered directly attributable to the generation of revenues from its customers. Accordingly, such costs included in cost of goods sold in the accompanying consolidated financial statements for the years ended June 30, 2017, 2016 and 2015 are $26.3 million, $27.0 million and $26.6 million, respectively.

The Company capitalizes coffee brewing equipment and depreciates it over five years and reports the depreciation expense in cost of goods sold. Such depreciation expense related to capitalized coffee brewing equipment reported in cost of goods sold in the fiscal years ended June 30, 2017, 2016 and 2015 was $9.1 million, $9.8 million and $10.4 million, respectively. The Company capitalized coffee brewing equipment (included in machinery and equipment) in the amounts of $10.8 million and $8.4 million in fiscal 2017 and 2016, respectively.

~~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 a capital lease. Capital lease obligations are amortized over the life of the lease.

For build-to-suit leases, 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. Upon exercise of the purchase option on a build-to-suit lease, the Company records an asset equal to the value of the option price that includes the value of the land and reverses the rent expense and the asset and liability established to record the construction costs incurred through the date of option exercise. See ~~Note 5~~.

~~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.

~~See~~ ~~Note 21.~~

~~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 21.~~

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

~~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 17~~. 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, 2017, 2016 and 2015 includes the dilutive effect of 117,007, 124,879 and 139,524 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 24,671, 30,931 and 10,455 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 22~~.

~~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 17~~. 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~~

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.

In addition, the Company estimates the expected impact of forfeited awards and recognizes share-based compensation cost only for those awards ultimately expected to vest. If actual forfeiture rates differ materially from the Company’s estimates, share-based compensation expense could differ significantly from the amounts the Company has recorded in the current period. The Company periodically reviews actual forfeiture experience and will revise its estimates, as necessary. The Company will recognize as compensation cost the cumulative effect of the change in estimated forfeiture rates on current and prior periods in earnings of the period of revision. As a result, if the Company revises its assumptions and estimates, the Company’s share-based compensation expense could change materially in the future.

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

The Company has outstanding share-based awards 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 performance 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 shares, and, to the extent share-based compensation expense was previously recognized for those cancelled shares, such share-based compensation expense is reversed. See ~~Note 18~~.

~~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 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 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. There were no intangible asset or goodwill impairment charges recorded in the fiscal years ended June 30, 2017, 2016 and 2015.

~~Other Intangible Assets~~

Other intangible assets consist of finite-lived intangible assets including acquired recipes, non-compete agreements, customer relationships, trade names, trademarks and a brand name. 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 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 years ended June 30, 2017 and 2016.

~~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 $23.5 million, $13.3 million and $8.3 million, respectively, in the fiscal years ended June 30, 2017, 2016 and 2015. The Company moved to 3PL for its long-haul distribution in the third quarter of fiscal 2016. As a result, payroll, benefits, vehicle costs and other costs associated with the Company’s internal operation of its long-haul distribution included elsewhere in selling expenses in the fiscal years ended June 30, 2016 and 2015, are represented in outsourced shipping and handling costs beginning in the third quarter of fiscal 2016. The amount associated with outside carriers for the Company's long-haul distribution recorded in shipping and handling costs in the fourth quarter of fiscal 2016 and in fiscal 2017 was less than the comparable aggregate operating costs associated with internally managing the Company’s long-haul distribution in the respective prior-year periods.

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

~~Collective Bargaining Agreements~~

Certain Company employees are subject to collective bargaining agreements. The duration of these agreements extend to 2020. At June 30, 2017, approximately 27% of the Company's workforce was covered by such agreements.

~~Self-Insurance~~

The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liability of certain risks including workers’ compensation, health care benefits, general liability, product liability, property insurance and director and officers’ liability insurance. Liabilities associated with risks retained by the Company are not discounted and are estimated by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions.

The Company's self-insurance for workers’ compensation liability includes estimated outstanding losses of unpaid claims. and allocated loss adjustment expenses (“ALAE”), case reserves, the development of known claims and incurred but not reported claims. ALAE are the direct expenses for settling specific claims. The amounts reflect per occurrence and annual aggregate limits maintained by the Company. The estimated liability analysis does not include estimating a provision for unallocated loss adjustment expenses.

The estimated gross undiscounted workers’ compensation liability relating to such claims was $9.4 million and $14.7 million respectively, and the estimated recovery from reinsurance was $1.5 million and $2.4 million, respectively, as of June 30, 2017 and 2016. 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, the Company had posted a $7.4 million letter of credit, 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 in California. The State of California notified the Company on December 13, 2016 that it had released and authorized the cancellation of the letter of credit. At June 30, 2017 and 2016, the Company had also posted $3.4 million in cash and a $4.3 million letter of credit, respectively, 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, 2017 and 2016 was $2.5 million and $1.3 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 $0.9 million at June 30, 2017 and 2016.~~

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 on its consolidated balance sheets. Changes in the funded status are recognized through AOCI, in the year in which the changes occur. See ~~Note 15~~.

~~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 and accounting expenses, are expensed as incurred and are included in general and administrative 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. See ~~Note 3~~.

~~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.

~~Recently Adopted Accounting Standards~~

In December 2016, the Financial Accounting Standards Board (the “FASB“) issued Accounting Standards Update (“ASU“) No. 2016-19, “Technical Corrections and Improvements“ (“ASU 2016-19“). The amendments cover a wide range of topics in the FASB Accounting Standards Codification. The amendments represent changes to make corrections or improvements to the Accounting Standards Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. ASU 2016-19 is effective for the Company immediately. Adoption of ASU 2016-19 did not 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 Company adopted ASU 2015-16 beginning July 1, 2016. Adoption of ASU 2015-16 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 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. The Company adopted ASU 2015-12 beginning July 1, 2016. Adoption of ASU 2015-12 did not 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. The Company adopted ASU 2015-07 beginning July 1, 2016. Adoption of ASU 2015-07 did not have a material effect on the results of operations, financial position or cash flows of the Company.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern“ (“ASU 2014-15“). ASU 2014-15 amended ASC 205-40-Presentation of Financial Statements-Going Concern and requires management to evaluate whether there are conditions and events that raise substantial doubt about an entity's ability to continue as a going concern within one year after the financial statements are available to be issued and provide related disclosures of such conditions and events. The amendments in ASU 2014-15 apply to all entities and are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company adopted ASU 2014-15 beginning July 1, 2016. Adoption of ASU 2014-15 did not have a material effect on the Company's results of operations, financial position and cash flows.

~~New Accounting Pronouncements~~

In March 2017, the FASB issued ASU No. 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost“ (“ASU 2017-07“). ASU 2017-07 amends 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. The guidance in ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, and is effective for the Company beginning July 1, 2018. The Company is evaluating the impact this guidance will have on its consolidated financial statements and expects the adoption will not have a significant impact 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.

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business“ (“ASU 2017-01“). The amendments in ASU 2017-01 clarify the definition of a business with the objective of adding guidance 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. Early application is permitted in certain circumstances. ASU 2017-01 is effective for the Company beginning July 1, 2018. Adoption of ASU 2017-01 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). The amendments require that a statement of cash flows 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. 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. Early application is permitted in certain circumstances. ASU 2016-18 is effective for the Company beginning July 1, 2018. Adoption of ASU 2016-18 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230):Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU 2016-15”). ASU 2016-15 addresses certain issues where diversity in practice was identified in classifying certain cash receipts and cash payments based on the guidance in 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. Early application is permitted in certain circumstances. ASU 2016-15 is effective for the Company beginning July 1, 2018. Adoption of ASU 2016-15 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.

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. The guidance in ASU 2016-09 is effective for public business entities for annual periods beginning after December 15, 2016, including interim periods within those annual reporting periods. 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. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments and a related right-of-use asset. 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 2016-02 is effective for the Company beginning July 1, 2019. The Company is evaluating the impact this guidance will have on its consolidated financial statements and expects the adoption will have a significant impact on the Company's financial position resulting from the increase in assets and liabilities.

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities” (“ASU 2016-01”). ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) at fair value, with changes in fair value recognized in net income. Under ASU 2016-01, entities will no longer be able to recognize unrealized holding gains and losses on available-for-sale equity securities in other comprehensive income, and they will no longer be able to use the cost method of accounting for equity securities that do not have readily determinable fair values. The guidance to classify equity securities with readily determinable fair values into different categories (that is trading or available for sale) is no longer required. ASU 2016-01 eliminates certain disclosure requirements related to financial instruments measured at amortized cost and adds disclosures related to the measurement categories of financial assets and financial liabilities. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. ASU 2016-01 is effective for the Company beginning July 1, 2018. Adoption of ASU 2016-01 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 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” (“ASU 2014-09“). ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. On August 12, 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 for public business entities for annual reporting periods beginning after December 31, 2017, including interim periods within those fiscal years. ASU 2014-09 is effective for the Company beginning July 1, 2018. The Company is currently evaluating the impact of ASU 2014-09 along with the related amendments and interpretations issued under ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 on its results of operations, financial position and cash flows.

None

~~Note 3. Acquisitions~~

~~China Mist Brands, Inc.~~

On October 11, 2016, the Company, through a wholly owned subsidiary, acquired substantially all of the assets and certain specified liabilities of China Mist, a provider of flavored iced teas and iced green teas. As part of the transaction, the Company assumed the lease on China Mist’s existing 17,400 square foot production, distribution and warehouse facility in Scottsdale, Arizona which is terminable upon twelve months’ notice.

The Company acquired China Mist for aggregate purchase consideration of $12.2 million consisting of $11.2 million in cash paid at closing, including estimated working capital adjustments of $0.4 million, post-closing final working capital adjustments of $0.6 million and up to $0.5 million in contingent consideration to be paid as earnout if certain sales levels are achieved in the calendar years of 2017 or 2018. This contingent earnout liability is currently estimated to have a fair value of $0.5 million and is recorded in other long-term liabilities on the Company’s consolidated balance sheet at June 30, 2017. The earnout is estimated to be paid in calendar 2019.

In fiscal 2017, the Company incurred $0.2 million in transaction costs related to the China Mist acquisition, consisting primarily of legal and accounting expenses, which are included in general and administrative expenses in the Company's consolidated statements of operations for the fiscal year ended June 30, 2017.

The financial effect of this acquisition was not material to the Company’s consolidated financial statements. The Company has not presented pro forma results of operations for the acquisition because it is not significant to the Company's consolidated results of operations.

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

PART III

The acquisition was accounted for as a business combination. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The purchase price allocation is final.

~~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, net of cash acquired $ 11,183

Post-closing final working capital adjustments 553

Contingent consideration 500

Total consideration $ 12,236

Accounts receivable $ 811

Inventory 544

Prepaid assets 48

Property, plant and equipment 189

Goodwill 2,927

Intangible assets:
  Recipes 930
7
  Non-compete agreement 100
5
  Customer relationships 2,000
10
  Trade name/Trademark—indefinite-lived 5,070

Accounts payable (383 )
  Total consideration, net of cash acquired $ 12,236

In connection with this acquisition, the Company recorded goodwill of $2.9 million, which is deductible for tax purposes. The Company also recorded $3.0 million in finite-lived intangible assets that included recipes, a non-compete agreement and customer relationships and $5.1 million in indefinite-lived trade name/trademark. The weighted average amortization period for the finite-lived intangible assets is 8.9 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 recipes was determined utilizing the replacement cost method, which captures the direct cost of the development effort plus lost profits over the time to re-create the recipes.

The fair value assigned to the non-compete agreement was determined utilizing the with and without method. Under the with and without method, the fair value of the intangible asset is estimated based on the difference in projected earnings with the agreement in place versus projected earnings based on starting with no agreement in place. Revenue and earnings projections were significant inputs into estimating the value of China Mist's non-compete agreement.

The fair value assigned to the customer relationships was determined based on management's estimate of the retention rate and 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.

~~West Coast Coffee Company, Inc.~~

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

On February 7, 2017, the Company acquired substantially all of the assets and 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 production, distribution and warehouse 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 $15.7 million, which included $14.7 million in cash paid at closing including working capital adjustments of $1.2 million, and up to $1.0 million in contingent consideration to be paid as earnout if certain sales levels are achieved in the twenty-four months following the closing. This contingent earnout liability is currently estimated to have a fair value of $0.6 million and is recorded in other long-term liabilities on the Company’s consolidated balance sheet at June 30, 2017. The earnout is estimated to be paid within the next twenty-four months.

In fiscal 2017, the Company incurred $0.3 million in transaction costs related to the West Coast Coffee acquisition, consisting primarily of legal and accounting expenses, which are included in general and administrative expenses in the Company's consolidated statements of operations for the fiscal year ended June 30, 2017.

~~The following table summarizes the preliminary allocation of consideration transferred as of the acquisition date:~~

(In thousands) Fair Value Estimated Useful Life (years)

Cash paid, net of cash acquired $ 14,671

Contingent consideration 600

Total consideration $ 15,271

Accounts receivable $ 955

Inventory 939

Prepaid assets 20

Property, plant and equipment 1,546

Goodwill 7,797

Intangible assets:
  Non-compete agreements 100
5
  Customer relationships 4,400
10
  Trade name—finite-lived 260
7
  Brand name—finite-lived 250
1.7
Accounts payable (814 )
Other liabilities (182 )
  Total consideration, net of cash acquired $ 15,271

The preliminary purchase price allocation is subject to change based on numerous factors, including the final adjusted purchase price and the final estimated fair value of the assets acquired and liabilities assumed.

In connection with this acquisition, the Company recorded goodwill of $7.8 million, which is deductible for tax purposes. The Company also recorded $5.0 million in finite-lived intangible assets that included non-compete agreements,

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

~~customer relationships, a trade name and a brand name. The weighted average amortization period for the finite-lived intangible assets is 9.3 years.~~

The fair value assigned to the non-compete agreements was determined utilizing the with and without method. Under the with and without method, the fair value of the intangible asset is estimated based on the difference in projected earnings with the agreements in place versus projected earnings based on starting with no agreements in place. Revenue and earnings projections were significant inputs into estimating the value of West Coast Coffee's non-compete agreements.

The fair value assigned to the customer relationships 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 fair values assigned to the trade name and the brand name were determined utilizing the relief from royalty method. The relief from royalty method is based on the premise that the intangible asset owner would be willing to pay a royalty rate to license the subject asset. The analysis involves forecasting revenue over the life of the asset, applying a royalty rate and a tax rate, and then discounting the savings back to present value at an appropriate discount rate.

~~Rae’ Launo Corporation~~

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 annual earnout payments of $0.1 million 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
Total finite-lived intangible assets 890

  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, 2017 and 2016 was $0.4 million and $0.6 million, respectively, and accumulated amortization as of June 30, 2017 and 2016 was $0.5 million and $0.3 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 two fiscal years.

~~Note 4. Restructuring Plans~~

~~Corporate Relocation Plan~~

On February 5, 2015, the Company announced 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 the New Facility in Northlake, Texas. Approximately 350 positions were impacted as a result of the

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

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.

Expenses related to the Corporate Relocation Plan in fiscal 2017 consisted of $1.1 million in employee retention and separation benefits, $6.2 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 $1.3 million in other related costs including travel, legal, consulting and other professional services. Facility-related costs in fiscal 2017 also included $2.5 million in non-cash charges, including $1.1 million in depreciation expense 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.

~~The following table sets forth the activity in liabilities associated with the Corporate Relocation Plan for the fiscal year ended June 30, 2017:~~

(In thousands)
Balances,
June 30, 2016
Additions Payments Non-Cash Settled(2) Adjustments
Balances,
June 30, 2017(1)
Employee-related costs(1) $ 2,342
$ 1,109
$ 3,150
$ —
$ —
$ 301
Facility-related costs —
6,187
3,712
2,475
—
—
Other 200
1,294
1,494
—
—
—
Total $ 2,542
$ 8,590
$ 8,356
$ 2,475
$ —
$ 301

Current portion $ 2,542
$ 301
Non-current portion $ —
$ —
Total $ 2,542
$ 301

~~_______________~~

~~(1) Included in “Accrued payroll expenses” on the Company's consolidated balance sheets.~~

(2) Non-cash settled facility-related costs represent (a) 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, and (b) non-cash rent expense recognized in the sale-leaseback of the Torrance Facility.

The Company estimated that it would incur approximately $31 million in cash costs in connection with the Corporate Relocation Plan consisting of $18 million in employee retention and separation benefits, $5 million in facility-related costs and $8 million in other related costs. Since the adoption of the Corporate Relocation Plan through June 30, 2017, the Company has recognized a total of $31.5 million in aggregate cash costs including $17.1 million in employee retention and separation benefits, $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 completed the Corporate Relocation Plan in the fourth quarter of fiscal 2017 and had $0.3 million in accrued costs remaining to be paid in fiscal 2018. The Company also recognized from inception through June 30, 2017 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. On July 13, 2017, the Company received correspondence from the WCT Pension Trust stating that it had liability for a share of the WCTPP unfunded vested benefits based on the WCT Pension Trust’s claim that certain of our employment actions resulting from the Corporate Relocation Plan amounted to a partial withdrawal from the WCTPP. See ~~Note 26~~.

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

The following table sets forth the activity in liabilities associated with the Corporate Relocation Plan from the time of adoption of the Corporate Relocation Plan through the fiscal year ended June 30, 2017:

(In thousands)
Balances,
June 30, 2014
Additions Payments Non-Cash Settled Adjustments Balances,
June 30, 2017
Employee-related costs(1) $ —
$ 17,352
$ 17,051
$ —
$ —
$ 301
Facility-related costs(2) —
10,779
7,048
3,731
—
—
Other —
7,424
7,424
—
—
—
Total(2) $ —
$ 35,555
$ 31,523
$ 3,731
$ —
$ 301

~~_______________~~

~~(1) Included in “Accrued payroll expenses” on the Company's consolidated balance sheets.~~

(2) Non-cash settled facility-related costs represent (a) 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 and (b) 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 expects to complete the DSD Restructuring Plan by the end of the second quarter of fiscal 2018.

The Company estimates that it will recognize approximately $3.7 million to $4.9 million of pre-tax restructuring charges by the end of the second quarter of fiscal 2018 consisting of approximately $1.9 million to $2.7 million in employee-related costs, including severance, prorated bonuses for bonus eligible employees, contractual termination payments and outplacement services, and $1.8 million to $2.2 million in other related costs, including legal, recruiting, consulting, other professional services, and travel. The Company may also incur other charges not currently contemplated due to events that may occur as a result of, or associated with, the DSD Restructuring Plan.

Expenses related to the DSD Restructuring Plan in fiscal 2017 consisted of $1.1 million in employee-related costs and $1.3 million in other related costs. As of June 30, 2017, the Company had paid a total of $1.7 million of these costs and had a balance of $0.7 million in DSD Restructuring Plan-related liabilities on the Company's consolidated balance sheet.

~~Note 5. New Facility~~

~~Lease Agreement and Purchase Option Exercise~~

On June 15, 2016, the Company exercised the purchase option to purchase the land and the partially constructed New Facility located thereon pursuant to the terms of the lease agreement dated as of July 17, 2015, as amended (the “Lease Agreement“). On September 15, 2016 (“Purchase Option Closing Date“), the Company closed the purchase option and acquired the land and the partially constructed New Facility located thereon for an aggregate purchase price of $42.5 million (the “Purchase Price”), consisting of the purchase option price of $42.0 million based on actual construction costs incurred as of the Purchase Option Closing Date plus the option exercise fee, plus amounts paid in respect of real estate commissions, title insurance, and recording fees. Upon closing of the purchase option, the Company recorded the aggregate purchase price of the New Facility in “Property, plant and equipment, net“ on its consolidated balance sheet. The asset related to the New Facility lease obligation included in “Property, plant and equipment, net,“ the offsetting liability for the lease obligation included in “Other long-term liabilities“ and the rent expense related to the land were reversed. Concurrent with the purchase option closing, on September 15, 2016, the Company terminated the Lease Agreement. The Company did not pay any early termination penalties in connection with the termination of the Lease Agreement.

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

~~Development Management Agreement~~

In conjunction with the Lease Agreement, the Company also entered into a Development Management Agreement with an affiliate of Stream Realty Partners (the “DMA“) to manage, coordinate, represent, assist and advise the Company on matters from the pre-development through construction of the New Facility. Pursuant to the DMA, the Company will pay the developer a development fee, an oversight fee and a development services fee the amounts of which are included in the construction costs incurred-to-date. As of June 30, 2017, the DMA has concluded and the Company had incurred $4.0 million under this agreement which amount is included in “Building and Facilities—New Facility“ (see ~~Note 13) of which $0.4 million remains to be paid which is included in Accounts payable on the Company's consolidated balance sheet at June 30, 2017.~~

~~Amended Building Contract~~

On September 17, 2016, the Company and The Haskell Company (“Builder”) entered into a Change Order, which, among other things, amended the building contract previously entered into between the Company and Builder to provide a guaranteed maximum price and the basis for the price and the scope of Builder’s services in connection with the construction of the New Facility (the “Amended Building Contract“).

Pursuant to the Amended Building Contract, Builder will provide pre-construction and construction services, including specialized industrial design and construction work in connection with Builder’s construction of certain production equipment that will be installed in portions of the New Facility (the “Project”). The Company engaged other designers and builders to provide traditional construction work on the Project site, including for the foundation, building envelope and roof of the New Facility. Pursuant to the Amended Building Contract, the Company will pay Builder up to $21.9 million for Builder’s services in connection with the Project. This amount is a guaranteed maximum price and is subject to adjustment in accordance with the terms of the Amended Building Contract. The Amended Building Contract includes an “IDB Work Contract Schedule,” which sets forth interim milestones, durations and material dates in relation to the performance and timing of Builder’s work. The Amended Building Contract includes remedies for the Company in the event agreed milestone dates relating to Builder’s services are not met. The Amended Building Contract is subject to customary undertakings, covenants, obligations, rights and conditions. In April 2017, the Company and Builder entered into a change order to change the scope of work which added $0.6 million to the Amended Building Contract. Builder’s work on the Project has been completed as of June 30, 2017. As of June 30, 2017, the Company has paid $20.3 million under this agreement, with a remaining $2.2 million to be paid which amount is included in “Building and Facilities—New Facility.“ See ~~Note 13~~.

~~New Facility Costs~~

The Company estimated that the total construction costs including the cost of land for the New Facility would be approximately $60 million. As of June 30, 2017, the Company has incurred an aggregate of $60.8 million and has outstanding contractual obligations of $1.6 million, which amounts are included in “Building and Facilities-New Facility.” See ~~Notes 13~~ ~~and~~ 23. In addition to the costs to complete the construction of the New Facility, the Company estimated that it would incur approximately $35 million to $39 million for machinery and equipment, furniture and fixtures and related expenditures of which the Company has incurred an aggregate of $33.2 million as of June 30, 2017, including $20.3 million under the Amended Building Contract, and has outstanding contractual obligations of $2.8 million. See ~~Note 23~~. The majority of the capital expenditures associated with machinery and equipment, furniture and fixtures, and related expenditures for the New Facility were incurred in the first three quarters of fiscal 2017. The Company commenced distribution activities at the New Facility during the second quarter of fiscal 2017 and initial production activities late in the third quarter of fiscal 2017. The Company began roasting coffee in the New Facility in the fourth quarter of fiscal 2017.

~~Note 6. 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 Spice Assets to Harris. Harris acquired substantially all of the Company’s personal property used exclusively in connection with the

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

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 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. Gain from the earnout on the sale is recognized when earned and when realization is assured beyond a reasonable doubt. The Company recognized $1.0 million and $0.5 million in earnout during the fiscal years ended June 30, 2017 and 2016, respectively, a portion of which is included in “Net gains from sale of Spice Assets” in the Company's consolidated statements of operations. 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 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 Company vacated the Torrance Facility in December 2016 and concluded the leaseback transaction. See ~~Note 7~~. 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 “Sale-leaseback financing obligation” on its consolidated balance sheet.

~~Sale of Northern California Branch Property~~

On September 30, 2016, the Company completed the sale of its branch property in Northern California for a sale price of $2.2 million and leased it back through March 31, 2017, at a base rent of $10,000 per month. The Company recognized a net gain on sale of the Northern California property in the fiscal year ended June 30, 2017 in the amount of $2.0 million.

~~Note 7. Assets Held for Sale~~

The Company had designated its Torrance Facility and one of its branch properties in Northern California 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. As of June 30, 2017, these assets were sold. See ~~Note 6~~.

~~Note 8. Derivative Instruments~~

~~Derivative Instruments Held~~

~~Coffee-Related Derivative Instruments~~

~~The Company is exposed to commodity price risk associated with its PTF green coffee purchase contracts, which are described further in~~ ~~Note 2~~. The Company utilizes forward and option contracts to manage exposure to the variability in expected future cash flows from forecasted purchases of green coffee attributable to commodity price risk. Certain of these

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

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, 2017 and 2016:~~

June 30,
(In thousands) 2017 2016
Derivative instruments designated as cash flow hedges:
  Long coffee pounds 33,038
32,550
Derivative instruments not designated as cash flow hedges:
  Long coffee pounds 2,121
1,618
  Less: Short coffee pounds —
(188 )
      Total 35,159
33,980

~~Coffee-related derivative instruments designated as cash flow hedges outstanding as of June 30, 2017 will expire within 18 months.~~

~~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
June 30, June 30,
(In thousands) 2017 2016 2017 2016
Financial Statement Location:
Short-term derivative assets:
Coffee-related derivative instruments(1) $ 66
$ 3,771
$ —
$ 183
Long-term derivative assets:
Coffee-related derivative instruments(2) $ 66
$ 2,575
$ —
$ 57
Short-term derivative liabilities:
Coffee-related derivative instruments $ 1,733
$ —
$ 190
$ —
Long-term derivative liabilities:
Coffee-related derivative instruments(2) $ 446
$ —
$ —
$ —

~~________________~~

~~(1) Included in “Short-term derivative liabilities” on the Company's consolidated balance sheet at June 30, 2017.~~

~~(2) Included in “Other long-term liabilities” on the Company's consolidated balance sheet at June 30, 2017.~~

~~Statements of Operations~~

~~Farmer Bros. Co.~~

~~Notes to Consolidated Financial Statements (continued)~~

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) 2017 2016 2015
Net (losses) gains recognized in AOCI (effective portion) $ (4,705 ) $ 303
$ (14,295 ) AOCI
Net gains (losses) recognized in earnings (effective portion) $ 1,732
$ (13,184 ) $ 4,211
Costs of goods sold
Net losses recognized in earnings (ineffective portion) $ (456 ) $ (575 ) $ (325 ) Other, net

For the fiscal years ended June 30, 2017, 2016 and 2015, 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, 2017, 2016 and 2015. 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.

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

Year Ended June 30,
(In thousands) 2017 2016 2015
Net losses on coffee-related derivative instruments $ (1,812 ) $ (298 ) $ (2,992 )
Net gains (losses) on investments 286
611
(270 )
     Net (losses) gains on derivative instruments and investments(1) (1,526 ) 313
(3,262 )
     Other gains, net 325
243
248
             Other, net $ (1,201 ) $ 556
$ (3,014 )

~~___________~~

~~(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, 2017, 2016 and 2015.~~

~~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, 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, 2017 Derivative Assets $ 132
$ (132 ) $ —
$ —
Derivative Liabilities $ 2,369
$ (132 ) $ —
$ 2,237
June 30, 2016 Derivative Assets $ 6,586
$ —
$ —
$ 6,586

~~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 extent 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, 2017, $(1.6) million of net losses 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, 2017. Due to the volatile nature of commodity prices, actual gains or losses realized within the next twelve months will likely differ from these values.

~~Note 9. Investments~~

In fiscal 2017, the Company liquidated substantially all of its trading securities to fund expenditures associated with its New Facility in Northlake, Texas. The Company had $0.4 million and $25.6 million in short-term investments at June 30, 2017 and 2016, respectively. The following table shows gains and losses on trading securities by the Company:

Year Ended June 30,
(In thousands) 2017 2016 2015
Total gains (losses) recognized from trading securities $ 286
$ 611
$ (270 )
Less: Realized gains from sales of trading securities 1,909
29
89
Unrealized (losses) gains from trading securities �� $ (1,623 ) $ 582
$ (359 )

~~Note 10. 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, 2017
Preferred stock(1) $ 368
$ —
$ 368
$ —
Derivative instruments designated as cash flow hedges:
Coffee-related derivative assets(2) $ 132
$ —
$ 132
$ —
Coffee-related derivative liabilities(2) $ 2,179
$ —
$ 2,179
$ —
Derivative instruments not designated as accounting hedges:
Coffee-related derivative liabilities(2) $ 190
$ —
$ 190
$ —

(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
$ —
Derivative instruments not designated as accounting hedges:
Coffee-related derivative assets(2) $ 240
$ —
$ 240
$ —

~~____________________~~



~~(1)~~Item 10.	~~Included in “Short-term investments” on the Company's consolidated balance sheets.~~Directors, Executive Officers and Corporate Governance



~~Item 10.~~	~~Directors, Executive Officers and Corporate Governance~~

Note 13. Employee Benefit Plans

The ~~information~~Company 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 forth~~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 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 Statement~~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.

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 incorporated~~the “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 Conduct~~Effective December 1, 2018 the Company amended and ~~Ethics~~

~~We maintain~~terminated the Farmer Bros. Co. Pension Plan for Salaried Employees (the “Farmer Bros. Plan”), a ~~written Code of Conduct and Ethics~~defined benefit pension plan for Company employees hired prior to January 1, 2010 who were not covered under a collective bargaining agreement. The Company previously amended the Farmer Bros. Plan, freezing the benefit for all 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 review~~Company spun off the benefit liability and obligations, and all allocable assets for all retirement plan benefits of certain active employees with accrued benefits in excess of $25,000, retirees and beneficiaries currently receiving benefit payments under the Farmer Bros. Plan, and former employees who have deferred vested benefits under the Farmer Bros. Plan, to the Brewmatic Plan. Upon termination of the ~~copies~~Farmer Bros. Plan, all remaining plan participants elected to receive a distribution of ~~such reports furnished~~his/her entire accrued benefit under the Farmer Bros. Plan in a single cash lump sum or an individual insurance company annuity contract, in either case, funded directly by Farmer Bros. Plan assets.

Termination of the Farmer Bros. Plan triggered re-measurement and settlement of the Farmer Bros. Plan and re-measurement of the Brewmatic Plan. As a result of the distributions to the remaining plan participants of the Farmer Bros. Plan, the Company ~~and written representations from certain reporting persons that no other reports were required during~~recognized a non-cash pension settlement charge of $10.9 million for the ~~fiscal~~ year ended June 30, ~~2017, its officers, directors~~2019.

F - 34

Farmer Bros. Co.

Notes to Consolidated Financial Statements (continued)

Obligations and ~~ten percent stockholders complied with all applicable Section 16(a) filing requirements, with~~Funded 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

F - 35

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 ~~exception~~target asset allocation of the ~~members~~plan and the Long-Term Capital Market Assumptions (CMA) 2018. 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 ~~a “group”~~the pension obligations, the investment horizon for the ~~purposes~~CMA 2018 is 20 to 30 years. In addition to forward-looking models, historical analysis of ~~Section 13(d)(3)~~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 ~~Securities Exchange Act~~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 ~~1934,~~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.

F - 36

Farmer Bros. Co.

Notes to Consolidated Financial Statements (continued)

Additional Disclosures



	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 ~~amended, identified in a Schedule 13D/A (Amendment No. 3) filed with~~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 SEC on August 29, 2017 and a Schedule 13D/A (Amendment No. 4) filed with the SEC on September 8, 2016 (collectively, the “Waite Group Schedule 13D/A”), including Carol Farmer Waite, as trustee, co-trustee, and/or sole beneficiary of certain family trusts named in the Waite Group Schedule 13D/A; Jonathan Michael Waite, as trustee and sole beneficiary of the 2012 Waite Irrevocable Trust; and individuals Suzanna Waite, Austin Waite, Emily Waite, Scott Grossman, Brett Grossman, Brynn Grossman, Tom Mortensen, John Samore, Jr. and Jennifer Gonzalez-Yousef (Mr. Samore and Ms. Gonzalez-Yousef each signed the Waite Group Schedule 13D/A but reported that they beneficially owned no shares of the Company’s common stock), who did not timely file or failed to file such reports upon becoming members of the identified Section 13(d)(3) group. The foregoing is in addition to any filings that may be listed intarget asset allocation for the Company's ~~Proxy Statement expected to be dated~~single employer pension plans— Brewmatic Plan and ~~filed with the SEC not later than 120 days after the conclusion of the Company's~~Hourly Employees' Plan—for fiscal ~~year ended June 30, 2017.~~

2020:



~~Item 11.~~	~~Executive Compensation~~Fiscal 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	%

F - 37

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 required~~Company is not aware of any refunds expected from single employer pension plans.

Estimated Future Benefit Payments

The following benefit payments are expected to be paid over the next 10 fiscal years:



(In thousands)	Brewmatic Plan		Hourly Employees’ Plan
Year Ending:
June 30, 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 will~~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 ~~set forth~~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 ~~Proxy~~multiemployer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

The Company received a letter dated July 10, 2018 from the WCT Pension Trust assessing withdrawal liability against the Company for a share of the WCTPP unfunded vested benefits, on the basis claimed by the WCT Pension Trust that employment actions by the Company in 2016 in connection with the Corporate Relocation Plan constituted a partial withdrawal from the WCTPP. 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.

F - 38

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 governed 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 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.

F - 39

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.

F - 40

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 ~~incorporated~~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 ~~this report by reference.~~ 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

F - 41

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.

F - 42

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	)

F - 43

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.

F - 44

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.

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

F - 45

Farmer Bros. Co.

Notes to Consolidated Financial Statements (continued)



~~Item 12.~~	~~Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters~~

Note 16. Share-based Compensation

Farmer Bros. Co. 2017 Long-Term Incentive Plan

On June 20, 2017 (the “Effective Date“), the Company’s stockholders approved the Farmer Bros. Co. 2017 Long-Term Incentive Plan (the “2017 Plan”). The 2017 Plan succeeded the Company's prior long-term incentive plans, the Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (the “Amended Equity Plan“) and the Farmer Bros. Co. 2007 Omnibus Plan (collectively, the “Prior Plans“). On the Effective Date, the Company ceased granting awards under the Prior Plans; however, awards outstanding under the Prior Plans will remain subject to the terms of the applicable Prior Plan.

The ~~information required~~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 ~~this item~~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 issuance. Shares of common stock granted under the 2017 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares. In no event will more than 900,000 shares of common stock be ~~set forth~~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.

F - 46

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 ~~Proxy Statement~~Black-Scholes valuation model for NQOs granted on the date of the 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 price volatility is ~~incorporated~~based on the historical volatility of the Company’s stock price. The risk-free interest rate is based on U.S. Treasury zero-coupon issues at the date of grant with a remaining term equal to the expected life of the stock options. The average expected term is based on historical weighted time outstanding and the expected weighted time outstanding calculated by assuming the settlement of outstanding awards at the midpoint between the vesting date and the end of the contractual term of the award. Currently, management estimates an annual forfeiture rate of 13.0% based on actual forfeiture experience. Forfeitures are estimated at the time of grant and revised, if necessary, in ~~this report by reference.~~

~~Equity Compensation Plan Information~~subsequent periods if actual forfeitures differ from those estimates.

~~Information about our equity~~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 ~~plans~~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, ~~that~~respectively.

F - 47

Farmer Bros. Co.

Notes to Consolidated Financial Statements (continued)

Non-qualified stock options with performance-based and time-based vesting (“PNQs”)

PNQ shares granted for each fiscal year are subject to forfeiture if a target modified net income goal is not attained. For this purpose, “Modified Net Income” is defined as net income (GAAP) before taxes and excluding any gains or losses from sales of assets, and excluding the effect of restructuring and other transition expenses. These PNQs have an exercise price equal the closing price of the Company’s common stock on the date of grant. One-third of the total number of shares subject to each such stock option vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.

Following are the assumptions used in the Black-Scholes valuation model for PNQs granted during the fiscal year ended, June 30, 2017, (PNQ shares were ~~either approved or~~ not ~~approved by our stockholders was as follows:~~granted during the fiscal years ended June 30, 2019 and 2018):

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(3)
Equity compensation plans approved by stockholders(1) 492,250 $23.76 —
Equity compensation plans approved by stockholders(2) — — 900,000
Equity compensation plans not approved by stockholders — — —
Total 492,250 $23.76 900,000



	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:

~~(1) Includes shares issued under~~



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 ~~Prior Plans.~~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.

~~(2) Includes shares available for issuance under~~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.

F - 48

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.

~~(3)~~

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. 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. The 2017 Plan also authorizes the grant of awards that are intended to qualify as “qualified performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code (the “Code”). 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 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.

F - 49

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 Local 807 Pension Fund, which was settled as of December 31, 2018.

(2) Represents the estimated fair value of earnout payable in connection with the Company’s acquisition of substantially all of the assets of West Coast Coffee completed on February 7, 2017.

(3) Represents accrued expenses related to working capital disputes in connection with the Company's acquisition of Boyd Coffee on October 2, 2017.

(4) Includes accrued property taxes, sales and use taxes, insurance liabilities and the current portion of cumulative preferred dividends, undeclared and 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.

F - 50

Farmer Bros. Co.

Notes to Consolidated Financial Statements (continued)

Note 19. Income Taxes

The ~~information required by this item~~current 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.

F - 51

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 forth~~realized, the Company considers whether it is probable that some or all of the deferred tax assets will not be realized. In determining whether the deferred taxes are realizable, the Company considers the period of expiration of the tax asset, historical and projected taxable income, and tax liabilities for the tax jurisdiction in which the tax asset is located. Valuation allowances are provided to reduce the amounts of deferred tax assets to an amount that is more likely than not to be realized based on an assessment of positive and negative evidence, including estimates of future taxable income necessary to realize future deductible amounts.

For the years ended June 30, 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 Statement~~Consolidated 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.

F - 52

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	—

F - 53

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

~~PART IV~~

F - 54

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.

F - 55

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

F - 56

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

F - 57

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.

F - 58

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.

F - 59

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	)	$	—	$	—


~~(a)~~	~~List of Financial Statements and Financial Statement Schedules:~~

~~1. Financial Statements included in Part II, Item 8 of this report:~~

F - 60

~~Consolidated Balance Sheets as of June 30, 2017 and 2016~~

~~Consolidated Statements of Operations for the Years Ended June 30, 2017, 2016 and 2015~~

~~Consolidated Statements of Comprehensive Income (Loss) for the Years Ended June 30, 2017, 2016 and 2015~~

~~Consolidated Statements of Cash Flows for the Years Ended June 30, 2017, 2016 and 2015~~

~~Consolidated Statements of Stockholders’ Equity for the Years Ended June 30, 2017, 2016 and 2015~~

~~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 (*).


~~(b)~~	~~Exhibits: See Exhibit Index.~~

Farmer Bros. Co.

Notes to Consolidated Financial Statements (continued)



~~Item 16.~~	~~Form 10-K Summary~~

Note 25. Subsequent Events

~~None.~~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:

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.

~~SIGNATURES~~Sale of Seattle Office Branch Property

On 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 Act~~sale of ~~1934,~~ the ~~registrant has duly caused~~Property, 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 ~~report~~time 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 signed~~customary 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 ~~behalf~~subsidiaries, other than through the PSA and Leaseback.

In connection with the sale leaseback contemplated by the ~~undersigned, thereunto duly authorized.~~




	F~~ARMER~~ B~~ROS. C~~O.

	~~By:~~		~~/s/Michael H. Keown~~
			~~Michael H. Keown~~ ~~President and Chief Executive Officer~~ ~~(chief executive officer)~~
			~~September 28, 2017~~

	~~By:~~		~~/s/ David G. Robson~~
			~~David G. Robson~~ ~~Treasurer and Chief Financial Officer~~ ~~(principal financial and accounting officer)~~
			~~September 28, 2017~~

~~Pursuant~~PSA, 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 of~~asset 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 registrant~~sale and ~~in the capacities and on the dates indicated.~~





~~/s/ Randy E. Clark~~	~~Chairman of the Board and Director~~	~~September 28, 2017~~
~~Randy E. Clark~~

~~/s/ Guenter W. Berger~~	~~Chairman Emeritus and Director~~	~~September 28, 2017~~
~~Guenter W. Berger~~

~~/s/ Hamideh Assadi~~	~~Director~~	~~September 28, 2017~~
~~Hamideh Assadi~~

	~~Director~~
~~Jeanne Farmer Grossman~~

~~/s/ Michael H. Keown~~	~~Director~~	~~September 28, 2017~~
~~Michael H. Keown~~

~~/s/ Charles F. Marcy~~	~~Director~~	~~September 28, 2017~~
~~Charles F. Marcy~~

~~/s/ Christopher P. Mottern~~	~~Director~~	~~September 28, 2017~~
~~Christopher P. Mottern~~

~~EXHIBIT INDEX~~



~~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 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on November 20, 2015 and incorporated herein by reference).*

~~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~~		Asset Purchase Agreement, dated as of August 18, 2017, by and among Farmer Bros. Co., Boyd Assets Co., Boyd Coffee Company, and each of the parties set forth on Exhibit A thereto (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 21, 2017 and incorporated herein by reference).*
~~3.1~~		~~Certificate of Incorporation of Farmer Bros. Co. (filed as Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 26, 2017 and incorporated herein by reference).~~
~~3.2~~		Certificate of Amendment to the Certificate of Incorporation of Farmer Bros. Co. (filed as Exhibit 3.2 to the Company's Current Report on Form 8-K filed with the SEC on June 26, 2017 and incorporated herein by reference).

~~3.3~~		Amended and Restated Bylaws (filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

~~3.4~~		~~Certificate of Elimination (filed as Exhibit 3.3 to the Company's Registration Statement on Form 8-A12B/A filed with the SEC on September 24, 2015 and incorporated herein by reference).~~

~~3.5~~		Form of Certificate of Designations of Series A Convertible Participating Cumulative Perpetual Preferred Stock of Farmer Bros. Co. (filed as Exhibit 3.1 to the Company's Current Report on Form 8-K filed with the SEC on August 21, 2017 and incorporated herein by reference).

~~4.1~~		~~Specimen Stock Certificate (filed as Exhibit 4.1 to the Company's Registration Statement on Form 8-A12B/A filed with the SEC on September 24, 2015 and incorporated herein by reference).~~

~~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).

~~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’s 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~~		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).**

~~10.7~~		Amendment No. 1 to Farmer Bros. Co. Retirement Plan effective June 30, 2011 (filed as Exhibit 10.4 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016 filed with the SEC on September 14, 2016 and incorporated herein by reference).**

~~10.8~~		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).**

~~10.9~~		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).**

~~10.10~~		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).**

~~10.11~~		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 for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).**

~~10.12~~		Action of the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement Plans amending the Farmer Bros. Co. Amended and Restated Employee Stock Ownership Plan, effective as of January 1, 2012 (filed herewith).**

~~10.13~~		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).**

~~10.14~~		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).**

~~10.15~~		Amendment dated October 6, 2016 to Farmer Bros. Co. Amended and Restated Employee Stock Ownership Plan (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 7, 2016 and incorporated herein by reference).**



~~10.16~~		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 for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

~~10.17~~		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 for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

~~10.18~~		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 for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

~~10.19~~		Employment Agreement, dated March 9, 2012, by and between Farmer Bros. Co. and Michael H. Keown (filed as Exhibit 10.18 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 filed with the SEC on May 10, 2017 and incorporated herein by reference).**

~~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).**

~~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 for the fiscal year ended June 30, 2015 filed with the SEC on September 14, 2015 and incorporated herein by reference).**

~~10.22~~		Employment Agreement, dated as of September 25, 2015, by and between Farmer Bros. Co. and Isaac N. Johnston, Jr. (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 29, 2015 and incorporated herein by reference).**

~~10.23~~		Employment Agreement, dated as of February 17, 2017, by and between Farmer Bros. Co. and David G. Robson (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 23, 2017 and incorporated herein by reference).**

~~10.24~~		Employment Agreement, dated as of February 17, 2017, by and between Farmer Bros. Co. and Ellen D. Iobst (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 23, 2017 and incorporated herein by reference).**

~~10.25~~		Employment Agreement, dated as of February 17, 2017, by and between Farmer Bros. Co. and Scott A. Siers (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on February 23, 2017 and incorporated herein by reference).**

~~10.26~~		Form of First Amendment to Employment Agreement entered into between Farmer Bros. Co. and each of Michael H. Keown, David G. Robson, Ellen D. Iobst, Scott W. Bixby, Scott A. Siers and Thomas J. Mattei, Jr. (filed as Exhibit 10.25 to the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 filed with the SEC on May 10, 2017 and incorporated herein by reference).**

~~10.27~~		Confidential General Release and Separation Agreement by and between Barry C. Fischetto and Farmer Bros. Co. dated February 17, 2017 (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 17, 2017 and incorporated herein by reference).**

~~10.28~~		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).**



~~10.29~~		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).**

~~10.30~~		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 for the quarter ended December 31, 2014 filed with the SEC on February 9, 2015 and incorporated herein by reference).**

~~10.31~~		Farmer Bros. Co. 2017 Long-Term Incentive Plan (as approved by the stockholders at the Special Meeting of Stockholders on June 20, 2017) filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on June 26, 2017 and incorporated herein by reference)**

~~10.32~~		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).**

~~10.33~~		Form of Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive 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 December 18, 2013 and incorporated herein by reference).**

~~10.34~~		Form of Farmer Bros. Co. 2007 Omnibus Plan Restricted Stock Award Grant Notice and Restricted Stock Award Agreement (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on April 4, 2013 and incorporated herein by reference).**

~~10.35~~		Form of Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan Restricted Stock Award Grant Notice and Restricted Stock Award Agreement (filed as Exhibit 10.3 to the Company's Current Report on Form 8-K filed with the SEC on December 18, 2013 and incorporated herein by reference).**

~~10.36~~		Stock Ownership Guidelines for Directors and Executive Officers (filed as Exhibit 10.27 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016 filed with the SEC on September 14, 2016 and incorporated herein by reference).**

~~10.37~~		Form of Change in Control Severance Agreement for Executive Officers of the Company (with schedule of executive officers attached) (filed as Exhibit 10.35 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 filed with the SEC on May 10, 2017 and incorporated herein by reference).**

~~10.38~~		Form of First Amendment to Change in Control Severance Agreement entered into between Farmer Bros. Co. and each of Michael H. Keown, David G. Robson, Ellen D. Iobst, Scott W. Bixby, Scott A. Siers and Thomas J. Mattei, Jr. (filed as Exhibit 10.36 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 filed with the SEC on May 10, 2017 and incorporated herein by reference).**

~~10.39~~		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 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on February 23, 2017 and incorporated herein by reference).**

~~10.40~~		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).

~~10.41~~		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 for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).



~~10.42~~		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 for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

~~10.43~~		Termination of Lease Agreement, dated as of September 15, 2016, by and between Farmer Bros. Co. as Tenant, and WF-FB NLTX, LLC as Landlord (filed as Exhibit 10.33 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 filed with the SEC on November 9, 2016 and incorporated herein by reference).

~~10.44~~		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).

~~10.45~~		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 for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

~~10.46~~		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 for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

~~10.47~~		AIA Document A141 - 2014, Standard Form of Agreement Between Owner and Design-Builder, dated as of September 22, 2015, between Farmer Bros. Co. and The Haskell Company (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on September 22, 2016 and incorporated herein by reference).

~~10.48~~		Change Order No. 12, dated as of September 17, 2016, between Farmer Bros. Co. and The Haskell Company (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on September 22, 2016 and incorporated herein by reference).

~~10.49~~		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 for the quarter ended March 31, 2016 filed with the SEC on May 6, 2016 and incorporated herein by reference).

~~10.50~~		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 as Exhibit 10.39 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2016 filed with the SEC on September 14, 2016 and incorporated herein by reference).

~~14.1~~		~~Farmer Bros. Co. Code of Conduct and Ethics adopted on August 26, 2010 and updated February 2013 and September 7, 2017 (filed herewith).~~

~~21.1~~		~~List of all Subsidiaries of Farmer Bros. Co. (filed herewith)~~.

~~23.1~~		~~Consent of Deloitte & Touche LLP, Independent Registered Public Accounting Firm (filed herewith)~~.

~~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).~~

~~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).



~~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).~~

~~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).~~
~~101~~		The following financial statements from the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2017, 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).

~~________________~~



*	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.

~~127~~

F - 61




Delaware		95-0725980
(State or other jurisdiction of ~~Incorporation)~~incorporation or organization)		(I.R.S. Employer Identification No.)


1912 Farmer Brothers Drive, Northlake, Texas 76262
(Address of Principal Executive Offices; Zip Code)

888-998-2468
(Registrant’s Telephone Number, Including Area Code)



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



Large accelerated filer	¨		Accelerated filer	þ
Non-accelerated filer	¨	~~(Do not check if a smaller reporting company)~~	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.	¨



PART I
ITEM 1.	Business	1
ITEM 1A.	Risk Factors	10
ITEM 1B.	Unresolved Staff Comments	2220
ITEM 2.	Properties	2220
ITEM 3.	Legal Proceedings	2320
ITEM 4.	Mine Safety Disclosures	2320
PART II
ITEM 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2421
ITEM 6.	Selected Financial Data	2623
ITEM 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2824
ITEM 7A.	Quantitative and Qualitative Disclosures About Market Risk	5547
ITEM 8.	Financial Statements and Supplementary Data	5748
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	~~116~~48
ITEM 9A.	Controls and Procedures	~~116~~48
ITEM 9B.	Other Information	~~118~~50
PART III
ITEM 10.	Directors, Executive Officers and Corporate Governance	~~118~~50
ITEM 11.	Executive Compensation	~~118~~50
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~119~~51
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	~~119~~51
ITEM 14.	Principal Accountant Fees and Services	~~119~~51
PART IV
ITEM 15.	Exhibits, ~~and~~ Financial Statement Schedules	~~119~~52
ITEM 16.	Form 10-K Summary	~~120~~58
SIGNATURES		~~121~~59
INDEX OF CONSOLIDATED FINANCIAL STATEMENTS		F - 1



Location	Approximate Area (Square Feet)	Purpose	Status
Northlake, TX	~~538,000~~535,585	Corporate headquarters, manufacturing, distribution, warehouse, product development lab	Owned
Houston, TX	330,877	Manufacturing and warehouse	Owned
Portland, OR	114,000	Manufacturing and distribution	Leased
Northlake, IL	89,837	Distribution and warehouse	Leased
Moonachie, NYNJ	41,404	Distribution and warehouse	Leased
Hillsboro, OR	20,400	Manufacturing, distribution and warehouse	Leased
Scottsdale, AZ	17,400	~~Manufacturing, distribution~~Distribution and warehouse	Leased



þ	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


•	a robust line of roast and ground coffee, including organic, Direct Trade, Project D.I.R.E.C.T.^® and other sustainably-produced offerings;


•	LEED® Certified Facilities. Our Portland production and distribution facility was one of the first in the Northwest to achieve LEED® Silver Certification. ~~We anticipate that our~~Our corporate offices ~~at the New Facility will also be~~in Northlake, Texas achieved LEED^® ~~certified.~~Silver Certification.



Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities



	Year Ended June 30, 2017				Year Ended June 30, 2016
	High		Low		High		Low
1st Quarter	$	36.96	$	29.16	$	28.16	$	20.90
2nd Quarter	$	37.55	$	30.05	$	32.94	$	26.99
3rd Quarter	$	37.15	$	31.25	$	31.63	$	24.04
4th Quarter	$	37.35	$	29.30	$	32.50	$	26.69



	2012		2013		2014		2015		2016		2017
Farmer Bros. Co.	$	100.00	$	176.63	$	271.48	$	295.23	$	402.76	$	380.03
Russell 2000 Index	$	100.00	$	124.21	$	153.57	$	164.02	$	153.90	$	195.20
Value Line Food Processing Index	$	100.00	$	119.96	$	146.81	$	156.96	$	185.97	$	198.18
Peer Group Index	$	100.00	$	120.41	$	133.80	$	152.14	$	186.31	$	191.75



Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations



~~Event~~		~~Date~~
~~Announced Corporate Relocation Plan~~		~~Q3 fiscal 2015~~
~~Transitioned coffee processing and packaging from Torrance production 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 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~~
~~Closed purchase option for New Facility~~		~~Q1 fiscal 2017~~
~~Entered into amended building contract with The Haskell Company~~		~~Q1 fiscal 2017~~
~~Exited from Torrance Facility~~		~~Q2 fiscal 2017~~
~~Commenced distribution from New Facility~~		~~Q2 fiscal 2017~~
~~Substantial completion of construction and relocation to New Facility~~		~~Q3 fiscal 2017~~
~~Transitioned Oklahoma City distribution operations to New Facility~~		~~Q3 fiscal 2017~~
~~Coffee roasting commenced in New Facility~~		~~Q4 fiscal 2017~~
~~Completed Corporate Relocation Plan~~		~~Q4 fiscal 2017~~



	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	%



	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	%



	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	)%



(In millions)	Year Ended June 30, 2018 vs. 2017			% of Total Mix Change
Effect of change in unit sales	$	67.5		103.8	%
Effect of pricing and product mix changes	(2.5		)	(3.8	)%
Total increase in net sales	$	65.0		100.0	%



(In millions)	Year Ended June 30, 2017 vs. 2016
Effect of change in unit sales	$	(7.4	)
Effect of pricing and product mix changes	4.5
Total decrease in net sales	$	(2.9	)


•	~~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~~.



(In millions)	Year Ended June 30, 2016 vs. 2015
Effect of change in unit sales	$	14.4
Effect of pricing and product mix changes	(15.9		)
Total decrease in net sales	$	(1.5	)



	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)	~~Acquisition~~Excludes $6.1 million, $6.6 million and ~~integration costs related to Boyd Coffee transaction only and include $244 and $1,490 incurred~~$6.4 million in the ~~third~~fiscal years ended June 30, 2019, 2018 and ~~fourth quarters~~2017, respectively, resulting from the adoption of ~~fiscal 2017, respectively. In~~ASU 2017-07.



	Expenditures Incurred						Budget
(In thousands)	Fiscal Year Ended June 30, 2017		Through Fiscal Year Ended June 30, 2016		Total		Lower bound		Upper bound
Building and facilities, including land	$	32,660	$	28,110	$	60,770	$	55,000	$	60,000
Machinery and equipment; furniture and fixtures	28,798		4,443		$	33,241	35,000		39,000
Total	$	61,458	$	32,553	$	94,011	$	90,000	$	99,000


	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	$	12,009	$	4,907	$	6,147	$	955	$	—	$	18,689	$	4,434	$	5,710	$	4,156	$	4,389
New Facility construction and equipment contracts(1)	4,439		4,439		—		—		—
Capital lease obligations(2)	1,235		994		237		4		—
Pension plan obligations(3)	92,677		14,097		16,390		17,320		44,870
Postretirement benefits other than pension plans(4)	15,801		5,880		1,960		2,131		5,830
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	27,621		27,621		—		—		—		92,000		—		—		92,000		—
Purchase commitments(5)	76,359		76,359		—		—		—
Purchase commitments(3)											61,244		61,244		—		—		—
Derivative liabilities—noncurrent											1,612		—		1,612		—		—
Cumulative Preferred dividends, undeclared and unpaid-non-current											924		—		924		—		—
Total contractual obligations	$	230,141	$	134,297	$	24,734	$	20,410	$	50,700	$	258,888	$	73,651	$	24,188	$	112,994	$	48,055


~~(4)~~	Includes $10.8 million in estimated future benefit payments on single employer postretirement plan obligations and $5.0 million in estimated 2018 contributions to multiemployer plans other than pension plans. See ~~Note 15~~, ~~Employee Benefit Plans,~~ ~~of the Notes to Consolidated Financial Statements included in Part II, Item 8 of this report.~~



($ in thousands)
Farmer Bros. Plan Discount Rate	3.3%		Actual 3.80%			4.3%
Net periodic benefit cost	$	5,638	$	1,515		$	4,495
Projected benefit obligation	$	155,829	$	146,291		$	137,686

Farmer Bros. Plan Rate of Return	6.3%		Actual 6.75%			7.3%
Net periodic benefit cost	$	1,991	$	1,515		$	1,040

Brewmatic Plan Discount Rate	3.3%		Actual 3.80%			4.3%
Net periodic benefit cost	$	36	$	68		$	46
Projected benefit obligation	$	4,320	$	4,080		$	3,863

Brewmatic Plan Rate of Return	6.3%		Actual 6.75%			7.3%
Net periodic benefit cost	$	83	$	68		$	53

Hourly Employees’ Plan Discount Rate	3.3%		Actual 3.80%			4.3%
Net periodic benefit cost	$	37	$	(4	)	$	(3	)
Projected benefit obligation	$	4,704	$	4,329		$	3,996

Hourly Employees' Plan Rate of Return	6.3%		Actual 6.75%			7.3%
Net periodic benefit cost	$	11	$	(4	)	$	(20	)



($ in thousands)	Market Value of Preferred Securities at June 30, 2017		Change in Market Value
Interest Rate Changes
–150 basis points	$	367.5	$	(0.2	)
–100 basis points	$	367.6	$	(0.1	)
Unchanged	$	367.7	$	—
+100 basis points	$	367.6	$	(0.1	)
+150 basis points	$	367.6	$	(0.1	)


	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)	$	274	$	(274	)	$	4,474	$	(4,474	)	$	674	$	(674	)	$	4,904	$	(4,904	)



	June 30, 2017			June 30, 2016
ASSETS
Current assets:
Cash and cash equivalents	$	6,241		$	21,095
Short-term investments	368			25,591
Accounts receivable, net of allowance for doubtful accounts of $721 and $714, respectively	46,446			44,364
Inventories	56,251			46,378
Income tax receivable	318			247
Short-term derivative assets	—			3,954
Prepaid expenses	7,540			4,557
Assets held for sale	—			7,179
Total current assets	117,164			153,365
Property, plant and equipment, net	176,066			118,416
Goodwill	10,996			272
Intangible assets, net	18,618			6,219
Other assets	6,837			9,933
Deferred income taxes	63,055			80,786
Total assets	$	392,736		$	368,991
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	39,784			23,919
Accrued payroll expenses	17,345			24,540
Short-term borrowings under revolving credit facility	27,621			109
Short-term obligations under capital leases	958			1,323
Short-term derivative liabilities	1,857			—
Other current liabilities	9,702			6,946
Total current liabilities	97,267			56,837
Accrued pension liabilities	51,281			68,047
Accrued postretirement benefits	19,788			20,808
Accrued workers’ compensation liabilities	7,548			11,459
Other long-term liabilities-capital leases	237			1,036
Other long-term liabilities	1,480			28,210
Total liabilities	$	177,601		$	186,397
Commitments and contingencies (Note 23)	—			—
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; 16,846,002 and 16,781,561 shares issued and outstanding at June 30, 2017 and 2016, respectively	16,846			16,782
Additional paid-in capital	41,495			39,096
Retained earnings	221,182			196,782
Unearned ESOP shares	(4,289		)	(6,434		)
Accumulated other comprehensive loss	(60,099		)	(63,632		)
Total stockholders’ equity	$	215,135		$	182,594
Total liabilities and stockholders’ equity	$	392,736		$	368,991



FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
	Year Ended June 30,
	2017			2016			2015
Cash flows from operating activities:
Net income	$	24,400		$	89,918		$	652
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	22,970			20,774			24,179
Provision for (recovery of) doubtful accounts	325			71			(8		)
Restructuring and other transition expenses, net of payments	1,034			(2,697		)	6,608
Interest on sale-leaseback financing obligation	681			—			—
Deferred income taxes	15,482			(80,314		)	123
Net gain from sale of Torrance Facility	(37,449		)	—			—
Net (gains) losses from sales of Spice Assets and other assets	(2,129		)	(8,405		)	394
ESOP and share-based compensation expense	3,959			4,342			5,691
Net (gains) losses on derivative instruments and investments	(205		)	12,910			(950		)
Change in operating assets and liabilities:
Restricted cash	—			1,002			(1,002		)
Purchases of trading securities	(5,136		)	(7,255		)	(3,661		)
Proceeds from sales of trading securities	30,645			5,901			2,358
Accounts receivable	(14		)	(3,476		)	2,078
Inventories	(8,504		)	3,608			20,470
Income tax receivable	(71		)	288			(307		)
Derivative assets (liabilities), net	2,305			(10,583		)	(7,269		)
Prepaid expenses and other assets	(2,506		)	(111		)	(1,332		)
Accounts payable	8,885			(3,343		)	(16,841		)
Accrued payroll expenses and other current liabilities	(2,983		)	5,829			(4,606		)
Accrued postretirement benefits	(1,020		)	(358		)	(1,507		)
Other long-term liabilities	(8,557		)	(473		)	1,860
Net cash provided by operating activities	$	42,112		$	27,628		$	26,930
Cash flows from investing activities:
Acquisitions of businesses, net of cash acquired	$	(25,853	)	$	—		$	(1,200	)
Purchases of property, plant and equipment	(45,195		)	(31,050		)	(19,216		)
Purchases of construction-in-progress assets for New Facility	(39,754		)	(19,426		)	—
Proceeds from sales of property, plant and equipment	4,078			10,946			273
Net cash used in investing activities	$	(106,724	)	$	(39,530	)	$	(20,143	)



Supplemental disclosure of cash flow information:
Cash paid for interest	$	1,504		$	425	$	769
Cash paid for income taxes	$	567		$	324	$	858
Supplemental disclosure of non-cash investing and financing activities:
Equipment acquired under capital leases	$	417		$	—	$	55
Net change in derivative assets and liabilities included in other comprehensive income (loss), net of tax	$	(3,933	)	$	8,249	$	(18,506	)
Construction-in-progress assets under New Facility lease	$	—		$	8,684	$	—
New Facility lease obligation	$	—		$	8,684	$	—
Non-cash additions to property, plant and equipment	$	5,517		$	441	$	51
Assets held for sale	$	—		$	7,179	$	—
Non-cash portion of earnout receivable recognized-Spice Assets sale	$	419		$	496	$	—
Non-cash portion of earnout payable recognized-China Mist acquisition	$	500		$	—	$	—
Non-cash portion of earnout payable recognized-West Coast Coffee acquisition	$	600		$	—	$	—
Non-cash working capital adjustment payable recognized-China Mist acquisition	$	553		$	—	$	—
Option costs paid with exercised shares	$	550		$	—	$	—



	Common Shares		Stock Amount			Additional Paid-in Capital			Retained Earnings		Unearned ESOP Shares			Accumulated Other Comprehensive Income (Loss)			Total
Balance at July 1, 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 expense of $5,238	—		—			—			—		—			8,249			8,249
Change in the funded status of retiree benefit obligations, net of tax expense 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
Net income	—		—			—			24,400		—			—			24,400
Unrealized losses on derivative instruments designated as cash flow hedges, net of reclassifications to cost of goods sold, net of tax benefit of $2,504	—		—			—			—		—			(3,933		)	(3,933		)
Change in the funded status of retiree benefit obligations, net of tax expense of $4,754	—		—			—			—		—			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		$	221,182	$	(4,289	)	$	(60,099	)	$	215,135



(In thousands)	Fair Value			Estimated Useful Life (years)

Cash paid, net of cash acquired	$	11,183
Post-closing final working capital adjustments	553
Contingent consideration	500
Total consideration	$	12,236

Accounts receivable	$	811
Inventory	544
Prepaid assets	48
Property, plant and equipment	189
Goodwill	2,927
Intangible assets:
Recipes	930			7
Non-compete agreement	100			5
Customer relationships	2,000			10
Trade name/Trademark—indefinite-lived	5,070
Accounts payable	(383		)
Total consideration, net of cash acquired	$	12,236



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
Total finite-lived intangible assets	890
Goodwill	272
Total assets acquired	$	1,500



(In thousands)	Balances, June 30, 2016		Additions		Payments		Non-Cash Settled(2)		Adjustments		Balances, June 30, 2017(1)
Employee-related costs(1)	$	2,342	$	1,109	$	3,150	$	—	$	—	$	301
Facility-related costs	—		6,187		3,712		2,475		—		—
Other	200		1,294		1,494		—		—		—
Total	$	2,542	$	8,590	$	8,356	$	2,475	$	—	$	301

Current portion	$	2,542									$	301
Non-current portion	$	—									$	—
Total	$	2,542									$	301

As of June 30,

Loan amount (in thousands)