Company Quick10K Filing
Quick10K
Farmer Brothers
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$17.78 17 $303
10-Q 2019-03-31 Quarter: 2019-03-31
10-Q 2018-12-31 Quarter: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-K 2018-06-30 Annual: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-31 Quarter: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-K 2017-06-30 Annual: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-Q 2016-12-31 Quarter: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-K 2016-06-30 Annual: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-Q 2015-12-31 Quarter: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-K 2015-06-30 Annual: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-Q 2014-12-31 Quarter: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-K 2014-06-30 Annual: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-Q 2013-12-31 Quarter: 2013-12-31
8-K 2019-05-20 Officers
8-K 2019-05-07 Earnings, Regulation FD, Exhibits
8-K 2019-05-07 Officers, Exhibits
8-K 2019-03-18 Regulation FD, Exhibits
8-K 2019-02-11 Earnings, Regulation FD, Exhibits
8-K 2018-12-06 Shareholder Vote, Other Events
8-K 2018-11-07 Earnings, Regulation FD, Exhibits
8-K 2018-10-23 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-10-15 Other Events
8-K 2018-09-27 Regulation FD, Exhibits
8-K 2018-09-13 Regulation FD, Exhibits
8-K 2018-09-11 Earnings, Regulation FD, Exhibits
8-K 2018-05-08 Earnings, Regulation FD, Exhibits
8-K 2018-03-12 Regulation FD, Exhibits
8-K 2018-02-09 Enter Agreement, Regulation FD, Exhibits
8-K 2018-02-06 Earnings, Regulation FD, Exhibits
SE SEA 10,230
NBLX Noble Midstream Partners 1,240
GBDC Golub Capital 1,090
RCKT Rocket Pharmaceuticals 951
DQ Daqo New Energy 448
CRR Carbo Ceramics 69
IFMK iFresh 17
MADI Madison Ave Holdings 0
GPT Gramercy Property Trust 0
CETY Clean Energy Technologies 0
FARM 2019-03-31
Part I - Financial Information (Unaudited)
Item 1. Financial Statements
Note 1. Introduction and Basis of Presentation
Note 2. Summary of Significant Accounting Policies
Note 3. Changes in Accounting Principles and Corrections To Previously Issued Financial Statements
Note 4. Acquisitions
Note 5. Restructuring Plans
Note 6. Derivative Instruments
Note 7. Fair Value Measurements
Note 8. Accounts Receivable, Net
Note 9. Inventories
Note 10. Property, Plant and Equipment
Note 11. Goodwill and Intangible Assets
Note 12. Employee Benefit Plans
Note 13. Revolving Credit Facility
Note 14. Employee Stock Ownership Plan
Note 15. Share-Based Compensation
Note 16. Other Current Liabilities
Note 17. Other Long-Term Liabilities
Note 18. Income Taxes
Note 19. Net (Loss) Income per Common Share
Note 20. Preferred Stock
Note 21. Revenue Recognition
Note 22. Commitments and Contingencies
Note 23. Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 farm-3312019ex311.htm
EX-31.2 farm-3312019xex312.htm
EX-32.1 farm-3312019xex321.htm
EX-32.2 farm-3312019xex322.htm

Farmer Brothers Earnings 2019-03-31

FARM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 farm-2019331x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number: 001-34249
FARMER BROS. CO.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
95-0725980
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
1912 Farmer Brothers Drive, Northlake, Texas 76262
(Address of Principal Executive Offices; Zip Code)
 
888-998-2468
(Registrant’s Telephone Number, Including Area Code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
 
 
Title of Each Class
Trading Symbol
Name of Each Exchange on Which Registered
Common Stock, $1.00 par value
FARM
The NASDAQ Global Select Market
 
 
 
None
(Former Address, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES  ý    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
¨
 
  
Accelerated filer
 
ý
Non-accelerated filer
¨
 
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
 
 
Exchange Act.
¨
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
YES ¨ NO  ý
As of April 30, 2019, the registrant had 17,040,100 shares outstanding of its common stock, par value $1.00 per share, which is the registrant’s only class of common stock.



TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






PART I - FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
FARMER BROS. CO.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share data)
 
March 31, 2019
 
June 30, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
12,194

 
$
2,438

Accounts receivable, net
65,755

 
58,498

Inventories
100,370

 
104,431

Income tax receivable
346

 
305

Short-term derivative assets
144

 

Prepaid expenses
7,082

 
7,842

Total current assets
185,891

 
173,514

Property, plant and equipment, net
191,250

 
186,589

Goodwill
36,224

 
36,224

Intangible assets, net
29,528

 
31,515

Other assets
9,962

 
8,381

Deferred income taxes

 
39,308

Total assets
$
452,855

 
$
475,531

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
62,810

 
56,603

Accrued payroll expenses
15,831

 
17,918

Short-term borrowings under revolving credit facility

 
89,787

Short-term obligations under capital leases
57

 
190

Short-term derivative liabilities
5,543

 
3,300

Other current liabilities
7,548

 
10,659

Total current liabilities
91,789

 
178,457

Long-term borrowings under revolving credit facility
123,000

 

Accrued pension liabilities
46,776

 
40,380

Accrued postretirement benefits
17,949

 
20,473

Accrued workers’ compensation liabilities
4,938

 
5,354

Other long-term liabilities
2,619

 
1,812

Total liabilities
$
287,071

 
$
246,476

Commitments and contingencies (Note 22)

 

Stockholders’ equity:
 
 
 
Preferred stock, $1.00 par value, 500,000 shares authorized; Series A Convertible Participating Cumulative Perpetual Preferred Stock, 21,000 shares authorized; 14,700 shares issued and outstanding as of March 31, 2019 and June 30, 2018; liquidation preference of $15,489 and $15,089 as of March 31, 2019 and June 30, 2018, respectively
15

 
15

Common stock, $1.00 par value, 25,000,000 shares authorized; 17,004,561 and 16,951,659 shares issued and outstanding as of March 31, 2019 and June 30, 2018, respectively
17,005

 
16,952

Additional paid-in capital
57,321

 
55,965

Retained earnings
155,072

 
220,307

Unearned ESOP shares

 
(2,145
)
Accumulated other comprehensive loss
(63,629
)
 
(62,039
)
Total stockholders’ equity
$
165,784

 
$
229,055

Total liabilities and stockholders’ equity
$
452,855

 
$
475,531

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

1



FARMER BROS. CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share data)
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2019
 
2018
 
2019
 
2018
Net sales
$
146,679

 
$
157,927

 
$
453,892

 
$
457,006

Cost of goods sold
106,779

 
105,629

 
312,513

 
302,349

Gross profit
39,900

 
52,298

 
141,379

 
154,657

Selling expenses
34,422

 
37,754

 
111,323

 
112,736

General and administrative expenses
11,306

 
14,157

 
32,063

 
39,822

Restructuring and other transition expenses
26

 
52

 
4,700

 
311

Net gains from sale of spice assets
(203
)
 
(110
)
 
(593
)
 
(655
)
Net losses (gains) from sales of other assets
451

 
(590
)
 
1,564

 
(446
)
Impairment losses on intangible assets

 
3,820

 

 
3,820

Operating expenses
46,002

 
55,083

 
149,057

 
155,588

Loss from operations
(6,102
)
 
(2,785
)
 
(7,678
)
 
(931
)
Other (expense) income:
 
 
 
 
 
 
 
Dividend income

 
1

 

 
12

Interest income

 

 

 
2

Interest expense
(2,981
)
 
(2,547
)
 
(9,165
)
 
(7,221
)
Pension settlement charge

 

 
(10,948
)
 

Other, net
495

 
1,817

 
2,105

 
5,782

Total other expense
(2,486
)
 
(729
)
 
(18,008
)
 
(1,425
)
Loss before taxes
(8,588
)
 
(3,514
)
 
(25,686
)
 
(2,356
)
Income tax expense (benefit)
43,161

 
(1,321
)
 
39,149

 
16,058

Net loss
$
(51,749
)
 
$
(2,193
)
 
$
(64,835
)
 
$
(18,414
)
Less: Cumulative preferred dividends, undeclared and unpaid
134

 
128

 
400

 
257

Net loss available to common stockholders
$
(51,883
)
 
$
(2,321
)
 
$
(65,235
)
 
$
(18,671
)
Net loss available to common stockholders per common share—basic
$
(3.05
)
 
$
(0.14
)
 
$
(3.84
)
 
$
(1.12
)
Net loss available to common stockholders per common share—diluted
$
(3.05
)
 
$
(0.14
)
 
$
(3.84
)
 
$
(1.12
)
Weighted average common shares outstanding—basic
17,003,206

 
16,760,145

 
16,982,247

 
16,727,624

Weighted average common shares outstanding—diluted
17,003,206

 
16,760,145

 
16,982,247

 
16,727,624


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


2



FARMER BROS. CO.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(In thousands)
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
2019
 
2018
 
2019
 
2018
Net loss
$
(51,749
)
 
$
(2,193
)
 
$
(64,835
)
 
$
(18,414
)
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Unrealized losses on derivative instruments designated as cash flow hedges, net of tax
(5,905
)
 
(2,430
)
 
(11,254
)
 
(4,255
)
Gains (losses) on derivative instruments designated as cash flow hedges reclassified to cost of goods sold, net of tax
3,201

 
438

 
6,311

 
(426
)
Change in funded status of retiree benefit obligations, net of tax
(1,943
)
 

 
(7,594
)
 

Pension settlement charge, net of tax
2,801

 

 
10,948

 

Total comprehensive loss, net of tax
$
(53,595
)
 
$
(4,185
)
 
$
(66,424
)
 
$
(23,095
)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.




3




FARMER BROS. CO.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In thousands, except share and per share data) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Shares
 
Preferred Stock Amount
 
Common
Shares
 
Common Stock
Amount
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Unearned
ESOP
Shares
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Balance at June 30, 2018
14,700

 
$
15

 
16,951,659

 
$
16,952

 
$
55,965

 
$
220,307

 
$
(2,145
)
 
$
(62,039
)
 
$
229,055

Net loss

 

 

 

 

 
(2,986
)
 

 

 
(2,986
)
Net reclassification of unrealized losses on cash flow hedges, net of taxes

 

 

 

 

 

 

 
(4,637
)
 
(4,637
)
ESOP compensation expense, including reclassifications

 

 

 

 
529

 

 

 

 
529

Share-based compensation

 

 

 

 
433

 

 

 

 
433

Stock option exercises

 

 
26,042

 
26

 
300

 

 

 

 
326

Cumulative preferred dividends, undeclared and unpaid

 

 

 

 

 
(132
)
 

 

 
(132
)
Balance at September 30, 2018
14,700

 
15

 
16,977,701

 
16,978

 
57,227

 
217,189

 
(2,145
)
 
(66,676
)
 
222,588

Net loss

 

 

 

 

 
(10,100
)
 

 

 
(10,100
)
Net reclassification of unrealized gains on cash flow hedges, net of taxes

 

 

 

 

 

 

 
2,398

 
2,398

Pension settlement charge, net of taxes

 

 

 

 

 

 

 
8,147

 
8,147

Change in the funded status of retiree benefit obligations, net of taxes

 

 

 

 

 

 

 
(5,651
)
 
(5,651
)
ESOP compensation expense, including reclassifications

 

 

 

 
(1,740
)
 

 
2,145

 

 
405

Share-based compensation

 

 
16,266

 
16

 
474

 

 

 

 
490

Stock option exercises

 

 
8,562

 
9

 
173

 

 

 

 
182

Cumulative preferred dividends, undeclared and unpaid

 

 

 

 

 
(134
)
 

 

 
(134
)
Balance at December 31, 2018
14,700

 
15

 
17,002,529

 
17,003

 
56,134

 
206,955

 

 
(61,782
)
 
218,325

Net loss

 

 

 

 

 
(51,749
)
 

 

 
(51,749
)
Net reclassification of unrealized losses on cash flow hedges, net of taxes

 

 

 

 

 

 

 
(2,705
)
 
(2,705
)
Pension settlement charge, net of taxes

 

 

 

 

 

 

 
2,801

 
2,801

Change in the funded status of retiree benefit obligations, net of taxes

 

 

 

 

 

 

 
(1,943
)
 
(1,943
)
ESOP compensation expense, including reclassifications

 

 

 

 
700

 

 

 

 
700

Share-based compensation

 

 
2,032

 
2

 
487

 

 

 

 
489

Cumulative preferred dividends, undeclared and unpaid

 

 

 

 

 
(134
)
 

 

 
(134
)
Balance at March 31, 2019
14,700

 
$
15

 
17,004,561

 
$
17,005

 
$
57,321

 
$
155,072

 
$

 
$
(63,629
)
 
$
165,784




The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


4




FARMER BROS. CO.
CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) (Continued)
(In thousands, except share and per share data) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Preferred Shares
 
Preferred Stock Amount
 
Common
Shares
 
Common Stock
Amount
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Unearned
ESOP
Shares
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Balance at June 30, 2017

 
$

 
16,846,002

 
$
16,846

 
$
41,495

 
$
236,993

 
$
(4,289
)
 
(61,493
)
 
$
229,552

Net income

 

 

 

 

 
840

 

 

 
840

Adjustment due to the adoption of ASU 2017-12

 

 

 

 

 
342

 

 
(209
)
 
133

Adjustment due to the adoption of ASU 2016-09

 

 

 

 

 
1,641

 

 

 
1,641

Net reclassification of unrealized losses on cash flow hedges, net of taxes

 

 

 

 

 

 

 
(993
)
 
(993
)
ESOP compensation expense, including reclassifications

 

 

 

 
580

 

 

 

 
580

Share-based compensation

 

 
(2,732
)
 
(3
)
 
229

 

 

 

 
226

Balance at September 30, 2017

 

 
16,843,270

 
16,843

 
42,304

 
239,816

 
(4,289
)
 
(62,695
)
 
231,979

Net loss

 

 

 

 

 
(17,060
)
 

 

 
(17,060
)
Net reclassification of unrealized losses on cash flow hedges, net of taxes

 

 

 

 

 

 

 
(1,215
)
 
(1,215
)
ESOP compensation expense, including reclassifications

 

 

 

 
(1,525
)
 

 
2,144

 

 
619

Share-based compensation

 

 
12,452

 
13

 
406

 

 

 

 
419

Stock option exercises

 

 
43,945

 
44

 
581

 

 

 

 
625

Consideration for Boyd Coffee acquisition
14,700

 
15

 

 

 
11,557

 

 

 

 
11,572

Cumulative preferred dividends, undeclared and unpaid

 

 

 

 

 
(129
)
 

 

 
(129
)
Balance at December 31, 2017
14,700

 
15

 
16,899,667

 
16,900

 
53,323

 
222,627

 
(2,145
)
 
(63,910
)
 
226,810

Net loss

 

 

 

 

 
(2,193
)
 

 

 
(2,193
)
Net reclassification of unrealized losses on cash flow hedges, net of taxes

 

 

 

 

 

 

 
(2,230
)
 
(2,230
)
ESOP compensation expense, including reclassifications

 

 

 

 
590

 

 

 

 
590

Share-based compensation

 

 
(565
)
 
(1
)
 
459

 

 

 

 
458

Stock option exercises

 

 
28,886

 
29

 
408

 

 

 

 
437

Cumulative preferred dividends, undeclared and unpaid

 

 

 

 

 
(128
)
 

 

 
(128
)
Balance at March 31, 2018
14,700

 
$
15

 
16,927,988

 
$
16,928

 
$
54,780

 
$
220,306

 
$
(2,145
)
 
$
(66,140
)
 
$
223,744



The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5



 
FARMER BROS. CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Nine Months Ended March 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net loss
$
(64,835
)
 
$
(18,414
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
Depreciation and amortization
23,160

 
22,727

Provision for doubtful accounts
1,886

 
369

Impairment losses on intangible assets

 
3,820

Change in estimated fair value of contingent earnout consideration

 
(500
)
Restructuring and other transition expenses, net of payments
1,956

 
(1,084
)
Deferred income taxes
40,078

 
15,698

Pension settlement charge
10,948

 

Net losses (gains) from sales of spice assets and other assets
971

 
(1,101
)
ESOP and share-based compensation expense
3,095

 
2,892

Net losses on derivative instruments and investments
9,228

 
305

Change in operating assets and liabilities:
 
 
 
Proceeds from sales of trading securities

 
375

Accounts receivable
(7,651
)
 
(8,417
)
Inventories
3,937

 
(7,348
)
Income tax receivable
1,621

 
162

Derivative assets (liabilities), net
(13,229
)
 
(6,129
)
Prepaid expenses and other assets
(1,441
)
 
921

Accounts payable
8,466

 
7,554

Accrued payroll expenses and other current liabilities
(7,786
)
 
353

Accrued postretirement benefits
(2,524
)
 
(1,353
)
Other long-term liabilities
(380
)
 
(2,476
)
Net cash provided by operating activities
$
7,500

 
$
8,354

Cash flows from investing activities:
 
 
 
Acquisition of businesses, net of cash acquired
$

 
$
(39,608
)
Purchases of property, plant and equipment
(30,393
)
 
(25,889
)
Purchases of assets for construction of New Facility

 
(1,577
)
Proceeds from sales of property, plant and equipment
143

 
1,565

Net cash used in investing activities
$
(30,250
)
 
$
(65,509
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility
$
50,642

 
$
76,513

Repayments on revolving credit facility
(17,417
)
 
(18,249
)
Payments of capital lease obligations
(185
)
 
(878
)
Payment of financing costs
(1,041
)
 
(560
)
Proceeds from stock option exercises
507

 
1,062

Net cash provided by financing activities
$
32,506

 
$
57,888

Net increase in cash and cash equivalents
$
9,756

 
$
733

Cash and cash equivalents at beginning of period
2,438

 
6,241

Cash and cash equivalents at end of period
$
12,194

 
$
6,974


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


6



FARMER BROS. CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - (continued)
(In thousands)
 
Nine Months Ended March 31,
 
2019
 
2018
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
        Net change in derivative assets and liabilities
           included in other comprehensive loss, net of tax
$
(4,943
)
 
$
(4,681
)
    Non-cash additions to property, plant and equipment
$
739

 
$
2,146

    Non-cash portion of earnout receivable recognized—spice assets sale
$
592

 
$
183

    Non-cash receivable from West Coast Coffee—post-closing final working capital adjustment
$

 
$
218

    Non-cash portion of earnout payable recognized—West Coast Coffee acquisition
$
1,000

 
$

    Non-cash consideration given—Issuance of Series A Preferred Stock
$

 
$
11,756

    Non-cash Multiemployer Plan Holdback payable recognized—Boyd Coffee acquisition
$

 
$
1,056

     Non-cash - Boyd Coffee post-closing working capital adjustment
$
2,277

 
$

    Cumulative preferred dividends, undeclared and unpaid
$
400

 
$
257


The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


7




FARMER BROS. CO.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Introduction and Basis of Presentation
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company”), is a national coffee roaster, wholesaler and distributor of coffee, tea, and culinary products.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the interim financial data have been included. Operating results for the three and nine months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2019. Events occurring subsequent to March 31, 2019 have been evaluated for potential recognition or disclosure in the unaudited condensed consolidated financial statements for the three and nine months ended March 31, 2019.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2018, filed with the Securities and Exchange Commission (the “SEC”) on September 13, 2018 (the “2018 Form 10-K”).
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries FBC Finance Company, a California corporation, Coffee Bean Holding Co., Inc., a Delaware corporation, the parent company of Coffee Bean International, Inc., an Oregon corporation (“CBI”), CBI, China Mist Brands, Inc., a Delaware corporation, Boyd Assets Co., a Delaware corporation, and Coffee Bean International LLC, a Delaware limited liability company. All inter-company balances and transactions have been eliminated.
The Company has reclassified certain prior period amounts to conform to the current year presentation.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company reviews its estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates and actual results may differ from those estimates.

8


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Note 2. Summary of Significant Accounting Policies
For a detailed discussion about the Company’s significant accounting policies, see Note 2, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements in the 2018 Form 10-K.
During the three and nine months ended March 31, 2019, other than as set forth below and the adoption of Accounting Standards Update (“ASU”) No. 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118” (“ASU 2018-05”), 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 No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”), ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”), ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”), and ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), there were no significant updates made to the Company’s significant accounting policies.
Interest Rate Swap
The Company follows the guidelines of Accounting Standards Codification (“ASC”) 815, “Derivatives and Hedging” (“ASC 815”), to account for interest rate swap derivative instruments as an accounting hedge. For interest rate swap derivative instruments designated as a cash flow hedge, the change in fair value of the derivative is reported as accumulated other comprehensive income (loss) (“AOCI”) and subsequently reclassified into interest expense in the period or periods when the hedged transaction affects earnings.
The Company’s interest rate swap derivative instruments are model-derived valuations with directly or indirectly observable significant inputs such as interest rate and, therefore, classified as Level 2.
Concentration of Credit Risk
At March 31, 2019 and June 30, 2018, the financial instruments which potentially expose the Company to concentration of credit risk consist of cash in financial institutions (in excess of federally insured limits), derivative instruments and trade receivables.
The Company does not have any credit-risk related contingent features that would require it to post additional collateral in support of its net derivative liability positions. See Note 6.
At March 31, 2019 and June 30, 2018, none of the cash in the Company’s coffee-related derivative margin accounts was restricted. Further changes in commodity prices and the number of coffee-related derivative instruments held, could have a significant impact on cash deposit requirements under certain of the Company's broker and counterparty agreements.
Approximately 33% and 20% of the Company’s trade accounts receivable balance was with five customers at March 31, 2019 and June 30, 2018, respectively. The Company estimates its maximum credit risk for accounts receivable at the amount recorded on the balance sheet. The trade accounts receivables are generally short-term and all probable bad debt losses have been appropriately considered in establishing the allowance for doubtful accounts.

Coffee Brewing Equipment and Service
The Company capitalizes coffee brewing equipment and depreciates it over five years and reports the depreciation expense in cost of goods sold. See Note 10. Further, the Company classifies certain expenses related to coffee brewing equipment provided to customers as cost of goods sold. These costs include 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 unaudited condensed consolidated financial statements in the three months ended March 31, 2019 and 2018 were $12.7 million and $11.6 million, respectively. Coffee brewing costs included in cost of goods sold in the accompanying unaudited condensed consolidated financial statements in the nine months ended March 31, 2019 and 2018 were $34.0 million and $29.4 million, respectively.




9


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Revenue Recognition
The Company’s significant accounting policy for revenue was updated as a result of the adoption of ASU 2014-09. The Company recognizes revenue in accordance with the five-step model prescribed by ASU 2014-09 in which the Company evaluates the transfer of promised goods or services and recognizes revenue when its customer obtains control of promised goods or services in an amount that reflects the consideration which the Company expects to be entitled to receive in exchange for those goods or services. To determine revenue recognition for the arrangements that the Company determines are within the scope of ASU 2014-09, the Company performs the following five steps: (1) identify the contract(s) with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the performance obligations in the contract, and (5) recognize revenue when (or as) the entity satisfies a performance obligation. See Note 21.
Shipping and Handling Costs
The Company’s shipping and handling costs are included in both cost of goods sold and selling expenses, depending on the nature of such costs. Shipping and handling costs included in cost of goods sold reflect inbound freight of raw materials and finished goods, and product loading and handling costs at the Company’s production facilities to the distribution centers and branches. Shipping and handling costs included in selling expenses consist primarily of those costs associated with moving finished goods to customers. Shipping and handling costs that were recorded as a component of the Company's selling expenses were $2.4 million and $4.2 million, respectively, in the three months ended March 31, 2019 and 2018. Shipping and handling costs that were recorded as a component of the Company's selling expenses were $9.0 million and $9.3 million, respectively, in the nine months ended March 31, 2019 and 2018.
Effective June 30, 2018, the Company implemented a change in accounting principle for freight costs incurred to transfer goods from a distribution center to a branch warehouse and warehousing overhead costs incurred to store and ready goods prior to their sale, and made certain corrections relating to the classification of allied freight, overhead variances and purchase price variances (“PPVs”) from expensing such costs as incurred within selling expenses to capitalizing such costs as inventory and expensing through cost of goods sold. See Note 3.
Pension Plans
The Company’s defined benefit pension plans are not admitting new participants, therefore, changes to pension liabilities are primarily due to market fluctuations of investments for existing participants and changes in interest rates. The Company’s defined benefit pension plans are accounted for using the guidance of ASC 710, “Compensation-General“ and ASC 715, “Compensation-Retirement Benefits“ and are measured as of the end of the fiscal year.
The Company recognizes the overfunded or underfunded status of a defined benefit pension plan as an asset or liability on its condensed consolidated balance sheets. Changes in the funded status are recognized through AOCI, in the year in which the changes occur. The Company recognizes pension settlements when payments from the plan exceed the sum of service and interest cost components of net periodic pension cost associated with the plan for the fiscal year. See Note 12.
The Company’s significant accounting policy for pension plans was updated as a result of the adoption of ASU 2017-07, which impacted the presentation of the components of net periodic benefit cost in the condensed consolidated statements of income. Net periodic benefit cost, other than the service cost component, is retrospectively included in “Interest expense” and “Other, net” in the condensed consolidated statements of income.

10


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Recently Adopted Accounting Standards
In March 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-05 which amends ASC 740, “Income Taxes,” to provide guidance on accounting for the tax effects of the Tax Cuts and Jobs Act enacted on December 22, 2017 (the “Tax Act”) pursuant to Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. Under SAB 118, companies are able to record a reasonable estimate of the impact of the Tax Act if one is able to be determined and report it as a provisional amount during the measurement period. The measurement period is not to extend beyond one year from the enactment date. The Company finalized its assessment of the income tax effects of the Tax Act in the second quarter of fiscal 2019. See Note 18.

In March 2017, the FASB issued ASU 2017-07 to amend the requirements in GAAP related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. Under ASU 2017-07, an entity must disaggregate and present the service cost component of net periodic benefit cost in the same income statement line items as other employee compensation costs arising from services rendered during the period, and only the service cost component will be eligible for capitalization. Other components of net periodic benefit cost must be presented separately from the line items that include the service cost. The guidance in ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Entities are required to use a retrospective transition method to adopt the requirement for separate income statement presentation of the service cost and other components, and a prospective transition method to adopt the requirement to limit the capitalization of benefit cost to the service component. The Company adopted ASU 2017-07 beginning July 1, 2018 using a retrospective transition method to reclassify net periodic benefit cost, other than the service component, from “Cost of goods sold,” “Selling expenses” and “General and administrative expenses” to “Interest expense” and “Other, net” in the condensed consolidated statements of income. Accordingly, “Interest expense” increased by $1.4 million and $1.6 million for the three months ended March 31, 2019 and 2018, respectively, and “Other, net” increased by $1.4 million and $1.7 million in the three months ended March 31, 2019 and 2018, respectively. “Interest expense” increased by $4.7 million and $4.9 million for the nine months ended March 31, 2019 and 2018, respectively, and “Other, net” increased by $4.9 million and $5.0 million in the nine months ended March 31, 2019 and 2018, respectively. See Note 3 and Note 6. In the fiscal years ended June 30, 2018 and 2017, “Interest expense” increased by $6.6 million and $6.4 million, respectively, and “Other, net” increased by $6.7 million and $6.8 million, respectively, due to reclassifications of net periodic benefit cost, other than the service component, as a result of adopting ASU 2017-07.
In January 2017, the FASB issued ASU 2017-01 to clarify the definition of a business. The objective of adding the guidance is to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses and provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace the missing elements. The guidance in ASU 2017-01 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, and should be applied prospectively. The Company adopted ASU 2017-01 beginning July 1, 2018. The Company will apply the new guidance to all applicable transactions after the adoption date.
In November 2016, the FASB issued ASU 2016-18 that requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. An entity with a material balance of restricted cash and restricted cash equivalents must disclose information about the nature of the restrictions. The guidance in ASU 2016-18 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-18 beginning July 1, 2018.
In August 2016, the FASB issued ASU 2016-15 to address certain issues where diversity in practice was identified in classifying certain cash receipts and cash payments based on the guidance in ASC 230, “Statement of Cash Flows” (“ASC 230”). ASC 230 is principles based and often requires judgment to determine the appropriate classification of cash flows as operating, investing or financing activities. The application of judgment has resulted in diversity in how certain cash receipts and cash payments are classified. Certain cash receipts and cash payments may have aspects of more than one class of cash flows. ASU 2016-15 clarifies that an entity will first apply any relevant guidance in ASC 230 and in other applicable topics. If there is no guidance that addresses those cash receipts and cash payments, an entity will determine each separately identifiable

11


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


source or use and classify the receipt or payment based on the nature of the cash flow. If a receipt or payment has aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. The guidance in ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-15 beginning July 1, 2018. Adoption of ASU 2016-15 did not have a material effect on the results of operations, financial position or cash flows of the Company.
In May 2014, the FASB issued ASU 2014-09 to amend the accounting guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 replaces most existing revenue recognition guidance in GAAP. The standard's core principle is that a company will recognize revenue when it transfers promised goods or services to a customer in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In 2015 and 2016, the FASB issued additional ASUs related to ASU 2014-09 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identification of performance obligations, and accounting for licenses, and included other improvements and practical expedients. ASU 2014-09 is effective for public business entities for annual reporting periods beginning after December 31, 2017, including interim periods within those fiscal years. The Company adopted ASU 2014-09 beginning July 1, 2018 using the modified retrospective method for all contracts not completed as of the date of adoption. Adoption of ASU 2014-09 did not have a material effect on the results of operations, financial position or cash flows of the Company. The Company has included expanded disclosures in this report related to revenue recognition in order to comply with ASU 2014-09. See Note 21.

New Accounting Pronouncements
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”). ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance in ASU 2018-15 is effective for public business entities for annual periods beginning after December 15, 2019, and interim periods within those fiscal years, and is effective for the Company beginning July 1, 2020.  Early adoption is permitted, including adoption in any interim period.  The Company is currently evaluating the impact ASU 2018-15 will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”). ASU 2018-14 modifies disclosure of other accounting and reporting requirements related to single-employer defined benefit pension or other postretirement benefit plans. The guidance in ASU 2018-14 is effective for public business entities for annual periods beginning after December 15, 2020, and is effective for the Company beginning July 1, 2021.  Early adoption is permitted.  The Company is currently evaluating the impact ASU 2018-14 will have on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 improves the effectiveness of fair value measurement disclosures and modifies the disclosure requirements on fair value measurements, including the consideration of costs and benefits. The guidance in ASU 2018-13 is effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years, and is effective for the Company beginning July 1, 2020.  Early adoption is permitted.  The Company is currently evaluating the impact ASU 2018-13 will have on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”).  ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act and requires certain disclosures about stranded tax effects.  The guidance in ASU 2018-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years, and is effective for the Company beginning July 1, 2019 and should be applied either in the period of adoption or retrospectively.  Early adoption is permitted.  The Company is currently evaluating the impact ASU 2018-02 will have on its consolidated financial statements.
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

12


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. The guidance in ASU 2017-04 is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and is effective for the Company beginning July 1, 2020. Adoption of ASU 2017-04 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which introduces a new lessee model that brings substantially all leases onto the balance sheet. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments and a related right-of-use asset. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases,” and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” which provide additional guidance to consider when implementing ASU 2016-02. For public business entities, ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early application is permitted. ASU 2016-02 is effective for the Company beginning July 1, 2019. The Company is currently identifying and compiling all leases and right–of–use terms to evaluate the impact of this guidance on its condensed consolidated financial statements, information systems, business processes, and financial statement disclosures. The Company expects the adoption will have a material effect on the Company’s financial position resulting from the increase in assets and liabilities as well as additional disclosures.

13


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Note 3. Changes in Accounting Principles and Corrections to Previously Issued Financial Statements
Effective June 30, 2018, the Company changed its method of accounting for its coffee, tea and culinary products from the LIFO basis to the FIFO basis. Total inventories accounted for utilizing the LIFO cost flow assumption represented 91% of the Company’s total inventories as of June 30, 2018 prior to this change in method. The Company believes that this change is preferable as it better matches revenues with associated expenses, aligns the accounting with the physical flow of inventory, and improves comparability with the Company’s peers.
Additionally, effective June 30, 2018, the Company implemented a change in accounting principle for freight costs incurred to transfer goods from a distribution center to a branch warehouse and warehousing overhead costs incurred to store and ready goods prior to their sale, from expensing such costs as incurred within selling expenses to capitalizing such costs as inventory and expensing through cost of goods sold. The Company has determined that it is preferable to capitalize such costs into inventory and expense through cost of goods sold because it better represents the costs incurred in bringing the inventory to its existing condition and location for sale to customers, and it is consistent with the Company’s accounting treatment of similar costs.
In connection with these changes in accounting principles, subsequent to the issuance of the Company's consolidated financial statements for the fiscal year ended June 30, 2017, the Company determined that freight associated with certain non-coffee product lines ("allied") was incorrectly expensed as incurred in selling expenses, and the overhead variances and purchase price variances (“PPVs”) associated with these product lines were incorrectly expensed as incurred in cost of goods sold for the fiscal years ended June 30, 2017 and 2016 and for the first three quarters in the fiscal year ended June 30, 2018. These costs should have been capitalized as inventory costs in accordance with ASC 330, "Inventory." Accordingly, the Company has corrected the accompanying condensed consolidated financial statements for the three and nine months ended March 31, 2018 to capitalize the appropriate portion of these costs in ending inventory and to reclassify remaining allied freight to cost of goods sold.
In accordance with SFAS No. 154, “Accounting Changes and Error Corrections,” the change in method of accounting for coffee, tea and culinary products and the change in accounting principle for freight and warehousing overhead costs have been retrospectively applied, and the corrections relating to the reclassification and capitalization of allied freight and the capitalization of allied overhead variances and PPVs have been made, to all prior periods presented herein.
The cumulative effect on retained earnings for these changes as of July 1, 2017 is $17.6 million.
In addition to the foregoing, during the nine months ended March 31, 2019, the Company adopted new accounting standards that required retrospective application. The Company updated the condensed consolidated statements of income as a result of adopting ASU 2017-07, and updated the condensed consolidated statements of cash flows as a result of adopting ASU 2016-18. See Note 2.


















14


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


The following table presents the impact of these changes on the Company's condensed consolidated statement of operations for the three months ended March 31, 2018:

 
 
Three Months Ended 
 March 31, 2018
(In thousands, except per share data)
 
As Previously Reported
 
LIFO to FIFO Adjustment
 
Preferable Freight and Warehousing Adjustments
 
Corrections of Freight, Overhead Variances and PPVs
 
ASU 2017-07 Adjustments(1)
 
Retrospectively Adjusted
Cost of goods sold
 
$
99,117

 
$
(891
)
 
$
5,888

 
$
1,602

 
$
(87
)
 
$
105,629

Gross profit
 
$
58,810

 
$
891

 
$
(5,888
)
 
$
(1,602
)
 
$
87

 
$
52,298

Selling expenses
 
$
44,736

 
$

 
$
(5,495
)
 
$
(1,200
)
 
$
(287
)
 
$
37,754

General and administrative expenses
 
$
13,766

 
$

 
$

 
$

 
$
391

 
$
14,157

Operating expenses
 
$
61,674

 
$

 
$
(5,495
)
 
$
(1,200
)
 
$
104

 
$
55,083

Loss from operations
 
$
(2,864
)
 
$
891

 
$
(393
)
 
$
(401
)
 
$
(18
)
 
$
(2,785
)
Interest expense
 
$
(902
)
 
$

 
$

 
$

 
$
(1,645
)
 
$
(2,547
)
Other, net
 
$
154

 
$

 
$

 
$

 
$
1,663

 
$
1,817

Total other expense
 
$
(747
)
 
$

 
$

 
$

 
$
18

 
$
(729
)
Loss before taxes
 
$
(3,611
)
 
$
891

 
$
(393
)
 
$
(401
)
 
$

 
$
(3,514
)
Income tax expense (benefit)
 
$
297

 
$
(1,562
)
 
$
436

 
$
(492
)
 
$

 
$
(1,321
)
Net loss
 
$
(3,908
)
 
$
2,452

 
$
(829
)
 
$
92

 
$

 
$
(2,193
)
Net loss available to common stockholders
 
$
(4,036
)
 
$
2,452

 
$
(829
)
 
$
92

 
$

 
$
(2,321
)
Net loss available to common stockholders per common share—basic
 
$
(0.24
)
 
$
0.14

 
$
(0.05
)
 
$
0.01

 
$

 
$
(0.14
)
Net loss available to common stockholders per common share—diluted
 
$
(0.24
)
 
$
0.14

 
$
(0.05
)
 
$
0.01

 
$

 
$
(0.14
)
_____________
(1) Reflects changes resulting from the adoption of ASU 2017-07. See Note 2.






















15


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)



The following table presents the impact of these changes on the Company's condensed consolidated statement of operations for the nine months ended March 31, 2018:

 
Nine Months Ended March 31, 2018
(In thousands, except per share data)
As Previously Reported
 
LIFO to FIFO Adjustment
 
Preferable Freight and Warehousing Adjustments
 
Corrections of Freight, Overhead Variances and PPVs
 
ASU 2017-07 Adjustments(1)
 
Retrospectively Adjusted
Cost of goods sold
$
283,670

 
$
994

 
$
15,578

 
$
2,323

 
$
(216
)
 
$
302,349

Gross profit
$
173,336

 
$
(994
)
 
$
(15,578
)
 
$
(2,323
)
 
$
216

 
$
154,657

Selling expenses
$
132,979

 
$

 
$
(16,418
)
 
$
(3,279
)
 
$
(546
)
 
$
112,736

General and administrative expenses
$
39,007

 
$

 
$

 
$

 
$
815

 
$
39,822

Operating expenses
$
175,016

 
$

 
$
(16,418
)
 
$
(3,279
)
 
$
269

 
$
155,588

Loss from operations
$
(1,680
)
 
$
(994
)
 
$
840

 
$
956

 
$
(53
)
 
$
(931
)
Interest expense
$
(2,286
)
 
$

 
$

 
$

 
$
(4,935
)
 
$
(7,221
)
Other, net
$
794

 
$

 
$

 
$

 
$
4,988

 
$
5,782

Total other expense
$
(1,478
)
 
$

 
$

 
$

 
$
53

 
$
(1,425
)
Loss before taxes
$
(3,158
)
 
$
(994
)
 
$
840

 
$
956

 
$

 
$
(2,356
)
Income tax expense
$
20,497

 
$
(4,931
)
 
$
1,699

 
$
(1,207
)
 
$

 
$
16,058

Net loss
$
(23,655
)
 
$
3,937

 
$
(859
)
 
$
2,163

 
$

 
$
(18,414
)
Net loss available to common stockholders
$
(23,912
)
 
$
3,937

 
$
(859
)
 
$
2,163

 
$

 
$
(18,671
)
Net loss available to common stockholders per common share—basic
$
(1.43
)
 
$
0.23

 
$
(0.05
)
 
$
0.13

 
$

 
$
(1.12
)
Net loss available to common stockholders per common share—diluted
$
(1.43
)
 
$
0.23

 
$
(0.05
)
 
$
0.13

 
$

 
$
(1.12
)
_________________
(1) Reflects changes resulting from the adoption of ASU 2017-07. See Note 2.


16


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


The following table presents the impact of these changes on the Company's condensed consolidated statement of cash flows for the nine months ended March 31, 2018:
 
 
Nine Months Ended 
 March 31, 2018
(In thousands)
 
As Previously Reported
 
LIFO to FIFO Adjustment
 
Preferable Freight and Warehousing Adjustments
 
Corrections of Freight, Overhead Variances and PPVs
 
Retrospectively Adjusted
Net loss
 
$
(23,655
)
 
$
3,937

 
$
(859
)
 
$
2,163

 
$
(18,414
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
Deferred income taxes
 
$
20,138

 
$
(4,932
)
 
$
1,699

 
$
(1,207
)
 
$
15,698

Net losses on derivative instruments and investments
 
$
3,292

 
$
(2,987
)
 
$

 
$

 
$
305

Change in operating assets and liabilities:
Inventories
 
$
(9,533
)
 
$
3,981

 
$
(840
)
 
$
(956
)
 
$
(7,348
)
Derivative assets (liabilities), net
 
$
(6,091
)
 
$
(38
)
 
$

 
$

 
$
(6,129
)
Accounts payable
 
$
7,516

 
$
38

 
$

 
$

 
$
7,554



The impacts shown above have also been reflected in the Company’s condensed consolidated statements of comprehensive loss for the three and nine months ended March 31, 2018 as follows:
 
Three Months Ended 
 March 31, 2018
 
Nine Months Ended 
 March 31, 2018
(In thousands)
As Previously Reported
 
Retrospectively Adjusted
 
As Previously Reported
 
Retrospectively Adjusted
Net loss
$
(3,908
)
 
$
(2,193
)
 
$
(23,655
)
 
$
(18,414
)
Unrealized losses on derivative instruments designated as cash flow hedges, net of tax
$
(2,437
)
 
$
(2,430
)
 
$
(4,148
)
 
$
(4,255
)
Gains (losses) on derivative instruments designated as cash flow hedges reclassified to cost of goods sold, net of tax
$
1,355

 
$
438

 
$
1,724

 
$
(426
)
Total comprehensive loss, net of tax
$
(4,990
)
 
$
(4,185
)
 
$
(26,079
)
 
$
(23,095
)


17


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Note 4. Acquisitions
Boyd Coffee Company
On October 2, 2017 (“Closing Date”), the Company acquired substantially all of the assets and certain specified liabilities of Boyd Coffee Company (“Boyd Coffee” or “Seller”), a coffee roaster and distributor with a focus on restaurants, hotels, and convenience stores on the West Coast of the United States. The acquired business of Boyd Coffee (the “Boyd Business”) is expected to add to the Company’s product portfolio, improve the Company’s growth potential, deepen the Company’s distribution footprint, and increase the Company’s capacity utilization at its production facilities.
At closing, as consideration for the purchase, the Company paid the Seller $38.9 million in cash from borrowings under its senior secured revolving credit facility (see Note 13) and issued to Boyd Coffee 14,700 shares of the Company’s Series A Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share (“Series A Preferred Stock”), with a fair value of $11.8 million as of the Closing Date. Additionally, the Company held back $3.2 million in cash (“Holdback Cash Amount”) and 6,300 shares of Series A Preferred Stock (“Holdback Stock”) with a fair value of $4.8 million as of the Closing Date, for the satisfaction of any post-closing working capital adjustment and to secure the Seller’s (and the other seller parties’) indemnification obligations under the purchase agreement.
In addition to the Holdback Cash, as part of the consideration for the purchase, at closing the Company held back $1.1 million in cash (the “Multiemployer Plan Holdback”) to pay, on behalf of the Seller, any assessment of withdrawal liability made against the Seller following the Closing Date in respect of the Seller’s multiemployer pension plan, which amount was recorded on the Company’s consolidated balance sheet in “Other long-term liabilities" at June 30, 2018. See Note 17. On January 8, 2019, the Seller notified the Company of the assessment of $0.5 million in withdrawal liability against the Seller, which the Company timely paid from the Multiemployer Plan Holdback during the three months ended March 31, 2019. The Company has applied the remaining amount of the Multiemployer Plan Holdback of $0.5 million towards satisfaction of the Seller’s post-closing net working capital deficiency under the Asset Purchase Agreement as of March 31, 2019 as described below.
The acquisition was accounted for as a business combination. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The fair value of consideration transferred reflected the Company’s best estimate of the post-closing net working capital adjustment of $8.1 million due to the Company at June 30, 2018 when the purchase price allocation was finalized. On January 23, 2019, PricewaterhouseCoopers LLP (“PwC”), as the “Independent Expert” designated under the Asset Purchase Agreement to resolve working capital disputes, issued its determination letter with respect to adjustments to working capital. The post-closing net working capital adjustment, as determined by the Independent Expert, was $6.3 million due to the Company.
As of March 31, 2019 the Company satisfied the $6.3 million amount by applying the remaining amount of the Multiemployer Plan Holdback of $0.5 million, retaining all of the Holdback Cash Amount of $3.2 million and canceling 4,630 shares of Holdback Stock with a fair value of $2.3 million based on the stated value and deemed conversion price under the Asset Purchase Agreement. The Company has retained the remaining 1,670 shares of the Holdback Stock pending satisfaction of certain indemnification claims against the Seller following which the remaining Holdback Stock, if any, will be released to the Seller.










18


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)



The following table summarizes the final allocation of consideration transferred as of the acquisition date:
(In thousands)
Fair Value
 
Estimated
Useful Life
(years)
 
 
 
 
Cash paid
$
38,871


 
Holdback Cash Amount
3,150

 
 
Multiemployer Plan Holdback
1,056

 
 
Fair value of Series A Preferred Stock (14,700 shares)(1)
11,756

 
 
Fair value of Holdback Stock (6,300 shares)(1)
4,825

 
 
Estimated post-closing net working capital adjustment
(8,059
)
 
 
Total consideration
$
51,599

 
 
 
 
 
 
Accounts receivable
$
7,503

 
 
Inventory
9,415

 
 
Prepaid expense and other assets
1,951

 
 
Property, plant and equipment
4,936

 
 
Goodwill
25,395

 
 
Intangible assets:
 
 
 
  Customer relationships
16,000

 
10
  Trade name/trademark—indefinite-lived
3,100

 
 
Accounts payable
(15,080
)
 
 
Other liabilities
(1,621
)
 
 
  Total consideration
$
51,599

 
 
______________
(1) Fair value of Series A Preferred Stock and Holdback Stock as of the Closing Date, estimated as the sum of (a) the present value of the dividends payable thereon and (b) the stated value of the Series A Preferred Stock or Holdback Stock, as the case may be, adjusted for both the conversion premium and the discount for lack of marketability arising from conversion restrictions.
In connection with this acquisition, the Company recorded goodwill of $25.4 million, which is deductible for tax purposes. The Company also recorded $16.0 million in finite-lived intangible assets that included customer relationships and $3.1 million in indefinite-lived intangible assets that included a trade name/trademark. The amortization period for the finite-lived intangible assets is 10.0 years. See Note 11.
The determination of the fair value of intangible assets acquired was primarily based on significant inputs not observable in an active market and thus represent Level 3 fair value measurements as defined under GAAP.
The fair value assigned to the customer relationships was determined based on management's estimate of the retention rate utilizing certain benchmarks. Revenue and earnings projections were also significant inputs into estimating the value of customer relationships.
The fair value assigned to the trade name/trademark was determined utilizing a multi-period excess earnings approach. Under the multi-period excess earnings approach, the fair value of the intangible asset is estimated to be the present value of future earnings attributable to the asset, and this method utilizes revenue and cost projections including an assumed contributory asset charge.



19


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)



The following table presents the net sales and income before taxes from the Boyd Business operations that are included in the Company’s condensed consolidated statements of operations for the three and nine months ended March 31, 2019 (unaudited):
(In thousands)
Three Months Ended
 
Nine Months Ended
 
March 31, 2019
 
March 31, 2019
Net sales
$
18,494

 
$
63,079

Income before taxes
$
668

 
$
4,884


The Company considers the acquisition to be material to the Company’s financial statements and has provided certain pro forma disclosures pursuant to ASC 805, “Business Combinations.”
The following table sets forth certain unaudited pro forma financial results for the Company for the three and nine months ended March 31, 2019 and 2018, as if the acquisition of the Boyd Business was consummated on the same terms as of the first day of the applicable fiscal period.
 
 
 
Three Months Ended March 31,
 
Nine Months Ended March 31,
 
 
2019
 
2018
 
2019
 
2018
(In thousands)
 
 
 
 
 
 
 
 
Net sales
 
$
146,679

 
$
157,927

 
$
453,892

 
$
478,988

Loss before taxes
 
$
(8,588
)
 
$
(3,514
)
 
$
(25,686
)
 
$
(2,029
)
The unaudited pro forma financial results for the Company are based on estimates and assumptions, which the Company believes are reasonable. These results are not necessarily indicative of the Company’s condensed consolidated statements of operations in future periods or the results that actually would have been realized had the Company acquired the Boyd Business during the periods presented.
At closing, the parties entered into a transition services agreement where the Seller agreed to provide certain accounting, marketing, human resources, information technology, sales and distribution and other administrative support during a transition period of up to 12 months. The Company also entered into a co-manufacturing agreement with the Seller for a transition period of up to 12 months as the Company transitioned production into its plants. Amounts paid by the Company to the Seller for these services totaled $3.7 million in the nine months ended March 31, 2019 and $10.2 million and $19.4 million in the three and nine months ended March 31, 2018, respectively. The transition services and co-manufacturing agreements expired on October 2, 2018 and no amounts were paid under these agreements in the three months ended March 31, 2019.
The Company has incurred acquisition and integration costs related to the Boyd Business acquisition, consisting primarily of inventory mark downs, legal expenses, Boyd Coffee plant decommissioning and equipment relocation costs, and one-time payroll and benefit expenses, of $2.4 million and $1.6 million during the three months ended March 31, 2019 and 2018, respectively, and $6.1 million and $5.0 million during the nine months ended March 31, 2019 and 2018, respectively. These expenses are included in cost of goods sold and operating expenses in the Company's condensed consolidated statements of operations.


20


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Note 5. Restructuring Plans
Corporate Relocation Plan
On February 5, 2015, the Company announced a plan (the “Corporate Relocation Plan”) to close its Torrance, California facility (the “Torrance Facility”) and relocate its corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California to a new facility in Northlake, Texas (the “New Facility”). Approximately 350 positions were impacted as a result of the Torrance Facility closure. The Company’s decision resulted from a comprehensive review of alternatives designed to make the Company more competitive and better positioned to capitalize on growth opportunities.
In the nine months ended March 31, 2019, the Company incurred $3.4 million in restructuring and other transition expenses associated with the assessment by the Western Conference of Teamsters Pension Trust (the “WCT Pension Trust”) of the Company’s share of the Western Conference of Teamsters Pension Plan (the “WCTPP”) unfunded benefits due to the Company’s partial withdrawal from the WCTPP as a result of employment actions taken by the Company in 2016 in connection with the Corporate Relocation Plan (see Note 12), of which the Company has paid $1.3 million and has outstanding contractual obligations of $2.1 million as of March 31, 2019.
Since the adoption of the Corporate Relocation Plan through March 31, 2019, the Company has recognized a total of $35.2 million in aggregate cash costs including $17.4 million in employee retention and separation benefits, $3.4 million in pension withdrawal liability, $7.0 million in facility-related costs related to the temporary office space, costs associated with the move of the Company’s headquarters, relocation of the Company’s Torrance operations and certain distribution operations and $7.4 million in other related costs. The Company also recognized from inception through March 31, 2019 non-cash depreciation expense of $2.3 million associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and $1.4 million in non-cash rent expense recognized in the sale-leaseback of the Torrance Facility.
Direct Store Delivery (“DSD”) Restructuring Plan
On February 21, 2017, the Company announced a 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 “DSD Restructuring Plan”). 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 fiscal 2019.
The Company estimates that it will recognize approximately $4.9 million of pre-tax restructuring charges by the end of fiscal 2019 consisting of approximately $2.7 million in employee-related costs and contractual termination payments, including severance, prorated bonuses for bonus eligible employees and outplacement services, and $2.2 million in other related costs, including legal, recruiting, consulting, other professional services, and travel. 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.
The Company incurred expenses related to the DSD Restructuring Plan in the amounts of $0.1 million and $0 in employee-related costs, and $1,500 and $0.1 million in other related costs for three months ended March 31, 2019 and 2018, respectively, and $1.3 million and $24,000 in employee-related costs and $0.2 million and $0.3 million in other related costs for the nine months ended March 31, 2019 and 2018, respectively. Since the adoption of the DSD Restructuring Plan through March 31, 2019, the Company has recognized a total of $4.5 million in aggregate cash costs including $2.6 million in employee-related costs, and $1.9 million in other related costs. As of March 31, 2019, the Company had paid a total of $4.4 million of these costs, and had a balance of $0.1 million in DSD Restructuring Plan-related liabilities on the Company’s condensed consolidated balance sheet. The remaining costs to be incurred for the remainder of fiscal 2019 are not expected to be material.


21


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Note 6. Derivative Instruments
Derivative Instruments Held
Coffee-Related Derivative Instruments
The Company is exposed to commodity price risk associated with its price to be fixed green coffee purchase contracts, which are described further in Note 2 to the consolidated financial statements in the 2018 Form 10-K. The Company utilizes forward and option contracts to manage exposure to the variability in expected future cash flows from forecasted purchases of green coffee attributable to commodity price risk. Certain of these coffee-related derivative instruments utilized for risk management purposes have been designated as cash flow hedges, while other coffee-related derivative instruments have not been designated as cash flow hedges or do not qualify for hedge accounting despite hedging the Company’s future cash flows on an economic basis.
The following table summarizes the notional volumes for the coffee-related derivative instruments held by the Company at March 31, 2019 and June 30, 2018:
(In thousands)
 
March 31, 2019
 
June 30, 2018
Derivative instruments designated as cash flow hedges:
 
 
 
 
  Long coffee pounds
 
35,213

 
40,913

Derivative instruments not designated as cash flow hedges:
 
 
 
 
  Long coffee pounds
 
4,394

 
2,546

      Total
 
39,607

 
43,459

Coffee-related derivative instruments designated as cash flow hedges outstanding as of March 31, 2019 will expire within 21 months.

Interest Rate Swap Derivative Instruments
Pursuant to an International Swap Dealers Association, Inc. Master Agreement (“ISDA”) which was effective March 20, 2019, the Company on March 27, 2019, entered into a swap transaction utilizing a notional amount of $80.0 million, with an effective date of April 11, 2019 and a maturity date of October 11, 2023 (the “Rate Swap”). The Rate Swap is intended to manage the Company’s interest rate risk on its floating-rate indebtedness under the Company’s revolving credit facility. Under the terms of the Rate Swap, the Company receives 1-month LIBOR, subject to a 0% floor, and makes payments based on a fixed rate of 2.1975%. The Company’s obligations under the ISDA are secured by the collateral which secures the loans under the revolving credit facility on a pari passu and pro rata basis with the principal of such loans. The Company has designated the Rate Swap derivative instruments as a cash flow hedge.
Interest rate swap derivative instruments designated as cash flow hedges outstanding as of March 31, 2019 will expire on October 11, 2023.

22


Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)


Effect of Derivative Instruments on the Financial Statements
Balance Sheets
Fair values of derivative instruments on the Company’s condensed consolidated balance sheets:
 
 
Derivative Instruments
Designated as Cash Flow Hedges
 
Derivative Instruments Not Designated as Accounting Hedges
 
 
March 31, 2019
 
June 30