Company Quick10K Filing
Farmer Brothers
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$0.00 17 $224
10-Q 2020-02-07 Quarter: 2019-12-31
10-Q 2019-11-08 Quarter: 2019-09-30
10-K 2019-09-11 Annual: 2019-06-30
10-Q 2019-05-08 Quarter: 2019-03-31
10-Q 2019-02-11 Quarter: 2018-12-31
10-Q 2018-11-09 Quarter: 2018-09-30
10-K 2018-09-13 Annual: 2018-06-30
10-Q 2018-05-09 Quarter: 2018-03-31
10-Q 2018-02-07 Quarter: 2017-12-31
10-Q 2017-11-07 Quarter: 2017-09-30
10-K 2017-09-28 Annual: 2017-06-30
10-Q 2017-05-10 Quarter: 2017-03-31
10-Q 2017-02-09 Quarter: 2016-12-31
10-Q 2016-11-09 Quarter: 2016-09-30
10-K 2016-09-14 Annual: 2016-06-30
10-Q 2016-05-06 Quarter: 2016-03-31
10-Q 2016-02-09 Quarter: 2015-12-31
10-Q 2015-11-09 Quarter: 2015-09-30
10-K 2015-09-14 Annual: 2015-06-30
10-Q 2015-05-11 Quarter: 2015-03-31
10-Q 2015-02-09 Quarter: 2014-12-31
10-Q 2014-11-10 Quarter: 2014-09-30
10-K 2014-09-16 Annual: 2014-06-30
10-Q 2014-05-08 Quarter: 2014-03-31
10-Q 2014-02-10 Quarter: 2013-12-31
10-Q 2013-11-07 Quarter: 2013-09-30
10-K 2013-10-09 Annual: 2013-06-30
10-Q 2013-05-06 Quarter: 2013-03-31
10-Q 2013-02-06 Quarter: 2012-12-31
10-Q 2012-11-05 Quarter: 2012-09-30
10-K 2012-09-10 Annual: 2012-06-30
10-Q 2012-05-08 Quarter: 2012-03-31
10-Q 2012-02-08 Quarter: 2011-12-31
10-Q 2011-11-08 Quarter: 2011-09-30
10-K 2011-09-13 Annual: 2011-06-30
10-Q 2011-05-10 Quarter: 2011-03-31
10-Q 2011-02-09 Quarter: 2010-12-31
10-Q 2010-11-09 Quarter: 2010-09-30
10-K 2010-09-13 Annual: 2010-06-30
10-Q 2010-05-10 Quarter: 2010-03-31
10-Q 2010-02-09 Quarter: 2009-12-31
8-K 2020-03-16 Officers, Regulation FD, Exhibits
8-K 2020-03-11 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2020-02-06 Earnings, Regulation FD, Exhibits
8-K 2020-01-23 Officers, Regulation FD, Other Events, Exhibits
8-K 2019-12-16 Shareholder Vote, Other Events
8-K 2019-11-18 Other Events, Exhibits
8-K 2019-11-18 M&A, Exhibits
8-K 2019-11-07 Officers, Exhibits
8-K 2019-11-07 Earnings, Regulation FD, Exhibits
8-K 2019-10-29 Officers
8-K 2019-09-11 Other Events
8-K 2019-09-10 Earnings, Officers, Regulation FD, Exhibits
8-K 2019-08-20 Officers
8-K 2019-08-01 Officers
8-K 2019-07-22 Officers, Exhibits
8-K 2019-05-20 Officers
8-K 2019-05-07 Earnings, Regulation FD, Exhibits
8-K 2019-05-07 Officers, Exhibits
8-K 2019-03-29 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2019-03-18 Regulation FD, Exhibits
8-K 2019-02-21 Officers, 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
FARM 2019-12-31
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. Leases
Note 4. Derivative Instruments
Note 5. Fair Value Measurements
Note 6. Accounts Receivable, Net
Note 7. Inventories
Note 8. Property, Plant and Equipment
Note 9. Goodwill and Intangible Assets
Note 10. Employee Benefit Plans
Note 11. Debt Obligations
Note 12. Employee Stock Ownership Plan
Note 13. Share-Based Compensation
Note 14. Other Current Liabilities
Note 15. Other Long-Term Liabilities
Note 16. Income Taxes
Note 17. Net Income (Loss) per Common Share
Note 18. Preferred Stock
Note 19. Revenue Recognition
Note 20. Commitments and Contingencies
Note 21. Sales of Assets
Note 22. 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-10.62 farmerbros2019amendmentn.htm
EX-31.1 farm-ex311.htm
EX-31.2 farm-ex312.htm
EX-32.1 farm-ex321.htm
EX-32.2 farm-ex322.htm

Farmer Brothers Earnings 2019-12-31

FARM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

Comparables ($MM TTM)
Ticker M Cap Assets Liab Rev G Profit Net Inc EBITDA EV G Margin EV/EBITDA ROA
LNDC 342 546 281 572 79 -5 12 435 14% 35.9 -1%
SENEA 295 1,046 633 1,270 55 11 39 522 4% 13.2 1%
FARM 228 440 278 587 172 -66 10 220 29% 21.8 -15%
SMPL 120 863 725 0 0 5 16 25 1.6 1%
RIBT 86 35 8 18 -0 -10 -9 83 -1% -8.9 -29%
DF 110 2,295 2,188 7,418 1,487 -465 -307 1,191 20% -3.9 -20%
FAMI 18 30 8 0 0 0 0 17 0%
LWAY 60 58 16 70 17 -1 2 54 24% 28.1 -1%
FTFT 28 65 140 1 0 -4 -2 59 53% -38.1 -6%
PETZ 7 17 19 0 0 0 0 4 0%

10-Q 1 farm-q22020x1231x10q.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 December 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(s)
Name of Each Exchange on Which Registered
Common Stock, $1.00 par value
FARM
NASDAQ Global Select Market
 
 
 
None
(Former Name, Former Address and Former Fiscal Year, 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 January 31, 2020, the registrant had 17,231,473 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)
 
December 31, 2019
 
June 30, 2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
9,130

 
$
6,983

Accounts receivable, net
60,404

 
55,155

Inventories
85,134

 
87,910

Income tax receivable
1,631

 
1,191

Short-term derivative assets
9,051

 
1,865

Prepaid expenses
5,820

 
6,804

Total current assets
171,170

 
159,908

Property, plant and equipment, net
171,983

 
189,458

Goodwill
36,224

 
36,224

Intangible assets, net
27,673

 
28,878

Other assets
9,520

 
9,468

Long-term derivatives assets
443

 
674

Right-of-use operating lease assets
19,696

 

Total assets
$
436,709

 
$
424,610

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
59,828

 
72,771

Accrued payroll expenses
16,021

 
14,518

Operating leases liabilities - current
5,571

 

Short-term derivative liabilities
368

 
1,474

Other current liabilities
7,982

 
7,309

Total current liabilities
89,770

 
96,072

Long-term borrowings under revolving credit facility
70,000

 
92,000

Accrued pension liabilities
45,717

 
47,216

Accrued postretirement benefits
22,597

 
23,024

Accrued workers’ compensation liabilities
5,000

 
4,747

Operating lease liabilities - noncurrent
14,318

 

Other long-term liabilities
3,147

 
4,057

Total liabilities
$
250,549

 
$
267,116

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock, $1.00 par value, 500,000 shares authorized; Series A Convertible Participating Cumulative Perpetual Preferred Stock, 21,000 shares authorized; 14,700 shares issued and outstanding as of December 31, 2019 and June 30, 2019; liquidation preference of $15,899 and $15,624 as of December 31, 2019 and June 30, 2019, respectively
15

 
15

Common stock, $1.00 par value, 25,000,000 shares authorized; 17,177,448 and 17,042,132 shares issued and outstanding as of December 31, 2019 and June 30, 2019, respectively
17,180

 
17,042

Additional paid-in capital
59,663

 
57,912

Retained earnings
158,310

 
146,177

Accumulated other comprehensive loss
(49,008
)
 
(63,652
)
Total stockholders’ equity
$
186,160

 
$
157,494

Total liabilities and stockholders’ equity
$
436,709

 
$
424,610

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 December 31,
 
Six Months Ended December 31,
 
2019
 
2018
 
2019
 
2018
Net sales
$
152,498

 
$
159,773

 
$
291,098

 
$
307,213

Cost of goods sold
108,513

 
106,529

 
206,472

 
205,734

Gross profit
43,985

 
53,244

 
84,626

 
101,479

Selling expenses
34,906

 
39,591

 
68,520

 
76,901

General and administrative expenses
11,266

 
12,140

 
24,006

 
20,757

Restructuring and other transition expenses

 
207

 

 
4,674

Net (gains) losses from sales of assets
(11,057
)
 
804

 
(23,662
)
 
723

Operating expenses
35,115

 
52,742

 
68,864

 
103,055

Income (loss) from operations
8,870

 
502

 
15,762

 
(1,576
)
Other (expense) income:
 
 
 
 
 
 
 
Interest expense
(2,859
)
 
(3,332
)
 
(5,407
)
 
(6,184
)
Pension settlement charge

 
(10,948
)
 

 
(10,948
)
Other, net
1,662

 
953

 
1,865

 
1,610

Total other expense
(1,197
)
 
(13,327
)
 
(3,542
)
 
(15,522
)
Income (loss) before taxes
7,673

 
(12,825
)
 
12,220

 
(17,098
)
Income tax benefit
(81
)
 
(2,725
)
 
(188
)
 
(4,012
)
Net income (loss)
7,754

 
(10,100
)
 
12,408

 
(13,086
)
Less: Cumulative preferred dividends, undeclared and unpaid
138

 
134

 
275

 
266

Net earnings (loss) available to common stockholders
$
7,616

 
$
(10,234
)
 
$
12,133

 
$
(13,352
)
Net earnings (loss) available to common stockholders per common share—basic
$
0.44

 
$
(0.60
)
 
$
0.71

 
$
(0.79
)
Net earnings (loss) available to common stockholders per common share—diluted
$
0.43

 
$
(0.60
)
 
$
0.69

 
$
(0.79
)
Weighted average common shares outstanding—basic
17,159,108

 
16,985,157

 
17,127,153

 
16,971,995

Weighted average common shares outstanding—diluted
17,583,335

 
16,985,157

 
17,550,144

 
16,971,995


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 December 31,
 
Six Months Ended December 31,
 
2019
 
2018
 
2019
 
2018
Net income (loss)
$
7,754

 
$
(10,100
)
 
$
12,408

 
$
(13,086
)
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on derivative instruments designated as cash flow hedges, net of tax
11,284

 
748

 
7,395

 
(5,349
)
Losses on derivative instruments designated as cash flow hedges reclassified to cost of goods sold and interest expense, net of tax
4,661

 
1,650

 
7,249

 
3,110

Change in funded status of retiree benefit obligations, net of tax

 
(5,651
)
 

 
(5,651
)
Pension settlement charge, net of tax

 
8,147

 

 
8,147

Total comprehensive income (loss), net of tax
$
23,699

 
$
(5,206
)
 
$
27,052

 
$
(12,829
)

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
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Balance at June 30, 2019
14,700

 
$
15

 
17,042,132

 
$
17,042

 
$
57,912

 
$
146,177

 
$
(63,652
)
 
$
157,494

Net income

 

 

 

 

 
4,654

 

 
4,654

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

 

 

 

 

 

 
(1,301
)
 
(1,301
)
ESOP compensation expense, including reclassifications

 

 
52,534

 
53

 
807

 

 

 
860

Share-based compensation

 

 

 

 
(1
)
 

 

 
(1
)
Issuance of common stock and stock option exercises

 

 
532

 

 

 

 

 

Cumulative preferred dividends, undeclared and unpaid

 

 

 

 

 
(137
)
 

 
(137
)
Balance at September 30, 2019
14,700

 
$
15

 
17,095,198

 
$
17,095

 
$
58,718

 
$
150,694

 
$
(64,953
)
 
$
161,569

Net income

 

 

 

 

 
7,754

 

 
7,754

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

 

 

 

 

 

 
15,945

 
15,945

ESOP compensation expense, including reclassifications

 

 
55,623

 
56

 
525

 

 

 
581

Issuance of common stock and stock option exercises

 

 

 

 
319

 

 

 
319

Stock option exercises

 

 
26,627

 
29

 
101

 

 

 
130

Cumulative preferred dividends, undeclared and unpaid

 

 

 

 

 
(138
)
 

 
(138
)
Balance at December 31, 2019
14,700

 
$
15

 
17,177,448

 
$
17,180

 
$
59,663

 
$
158,310

 
$
(49,008
)
 
$
186,160




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, 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

Issuance of common stock and 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

Issuance of common stock and 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



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)
 
Six Months Ended December 31,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net income (loss)
$
12,408

 
$
(13,086
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
15,211

 
15,630

Restructuring and other transition expenses, net of payments

 
2,457

Deferred income taxes

 
(3,265
)
Pension settlement charge

 
10,948

Net (gains) losses from sales of assets
(23,662
)
 
723

Net losses on derivative instruments
4,075

 
6,205

Other adjustments
1,794

 
3,494

Change in operating assets and liabilities:
 
 
 
Accounts receivable
(5,285
)
 
(21,299
)
Inventories
1,804

 
(11,326
)
Derivative assets (liabilities), net
1,965

 
(9,234
)
Other assets
361

 
1,194

Accounts payable
(10,608
)
 
21,534

Accrued expenses and other liabilities
(258
)
 
(9,621
)
Net cash used in operating activities
$
(2,195
)
 
$
(5,646
)
Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(9,007
)
 
(23,120
)
Proceeds from sales of property, plant and equipment
35,247

 
105

Net cash provided (used) in investing activities
$
26,240

 
$
(23,015
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility
$
38,000

 
$
40,642

Repayments on revolving credit facility
(60,000
)
 
(429
)
Payments of finance lease obligations
(27
)
 
(137
)
Payment of financing costs

 
(1,027
)
Proceeds from stock option exercises
129

 
507

Net cash (used) provided by financing activities
$
(21,898
)
 
$
39,556

Net increase in cash and cash equivalents
$
2,147

 
$
10,895

Cash and cash equivalents at beginning of period
6,983

 
2,438

Cash and cash equivalents at end of period
$
9,130

 
$
13,333


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)
 
Six Months Ended December 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
$
14,644

 
$
(2,239
)
    Non-cash additions to property, plant and equipment
$
284

 
$
2,928

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

 
$
390

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

 
$
840

    Non-cash issuance of 401-K common stock
$
109

 
$

    Cumulative preferred dividends, undeclared and unpaid
$
275

 
$
266


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 six months ended December 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2020. Events occurring subsequent to December 31, 2019 have been evaluated for potential recognition or disclosure in the unaudited condensed consolidated financial statements for the three and six months ended December 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, 2019, filed with the Securities and Exchange Commission (the “SEC”) on September 11, 2019 (the “2019 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.
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 2019 Form 10-K.
During the three and six months ended December 31, 2019, other than as set forth below and the adoption of Financial Accounting Standards Board Accounting (“FASB”) Standards Update (“ASU”) ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), there were no significant updates made to the Company’s significant accounting policies.
Concentration of Credit Risk
At December 31, 2019 and June 30, 2019, the financial instruments which potentially expose the Company to concentration of credit risk consist of cash in financial institutions (in excess of federally insured limits), derivative instruments and trade receivables.
The Company does not have any credit-risk related contingent features that would require it to post additional collateral in support of its net derivative liability positions. At December 31, 2019 and June 30, 2019, none of the cash in the Company’s coffee-related derivative margin accounts was restricted. Further changes in commodity prices and the number of coffee-related derivative instruments held, could have a significant impact on cash deposit requirements under certain of the Company's broker and counterparty agreements.
Approximately 34% and 28% of the Company’s trade accounts receivable balance was with five customers at December 31, 2019 and June 30, 2019, respectively. The Company estimates its maximum credit risk for accounts receivable at the amount recorded on the balance sheet. The trade accounts receivables are generally short-term and all probable bad debt losses have been appropriately considered in establishing the allowance for doubtful accounts.

Adoption of ASC 842 - Leases
Effective July 1, 2019, the Company adopted the FASB Topic 842 (“ASC 842”), Leases. The Company adopted ASC 842 under the modified retrospective approach using the practical expedient; therefore, the presentation of prior year periods has not been adjusted. No cumulative effect of initially adopting ASC 842 as an adjustment to the opening balance of components of equity as of July 1, 2019 was necessary. The adoption of ASC 842 resulted in the recording of Operating lease right-of-use assets and Operating lease liabilities of $16.3 million, as of July 1, 2019. The adoption of ASC 842 had no impact on retained earnings. See Note 3 for detail discussions on the adoption of ASC 842.
Right-of-use lease assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the company will exercise that option. Lease expense is primarily recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are combined for certain assets classes.





9


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


Recent Accounting Pronouncements
The Company considers the applicability and impact of all ASUs issued. ASUs not listed below were assessed and either determined to be not applicable or expected to have minimal impact on its condensed consolidated financial statements.

The following table provides a brief description of the applicable recent ASUs issued by the FASB:
Standard
 
Description
 
Effective Date
 
Effect on the Financial Statements or Other Significant Matters
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”).
 
ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.
 
Annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period.
 
Effective for the Company beginning July 1, 2020. 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 the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that no longer are considered cost beneficial, clarifying the specific requirements of disclosures and adding disclosure requirements identified as relevant.
 
Annual periods beginning after December 15, 2020.  Early adoption is permitted.
 
Effective for the Company beginning July 1, 2021. The Company is currently evaluating the impact ASU 2018-14 will have on its consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”).
 
ASU 2018-02 provides entities an option to reclassify certain stranded tax effects resulting from the tax reform from accumulated other comprehensive income to retained earnings.

 
The guidance in ASU 2018-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years, and should be applied either in the period of adoption or retrospectively.
 
The Company did not elect the option to reclassify certain stranded tax effects resulting from the tax reform from accumulated other comprehensive income to retained earnings.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”).
 
The amendments in ASU 2017-04 address concerns regarding the cost and complexity of the two-step goodwill impairment test, and remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment.
 
Annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019.
 
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 June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2016-13.
 
The objective of the guidance in ASU 2016-13 is to allow entities to recognize estimated credit losses in the period that the change in valuation occurs. The amendments in ASU 2016-13 requires an entity to present financial assets measured on an amortized cost basis on the balance sheet net of an allowance for credit losses.
The model requires an estimate of the credit losses expected over the life of an exposure or pool of exposures. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.
 
Annual reporting periods beginning after December 15, 2019 and interim periods within those reporting periods.
 
Effective for the Company beginning July 1, 2020. The Company is currently evaluating the impact of adoption on its financial statements and related disclosures, but does not anticipate a material impact to the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2016-02.
 
ASU 2016-02 requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases. Subsequent guidance issued after February 2016 did not change the core principle of ASU 2016-02.
 
Annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early application is permitted.
 
The Company adopted the new guidance effective July 1, 2019, using the modified retrospective transition method, which did not require the Company to adjust comparative periods. See Note 3 for the applicable disclosure of ASU 2016-02 adoption. .



10


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


Note 3. Leases
The Company makes a determination if an arrangement constitutes a lease at inception, and categorizes the lease as either an operating or finance lease. Operating leases are included in right-of-use operating lease assets and operating lease liabilities in the Company's Condensed Consolidated Balance Sheets. Finance leases are included in property, plant and equipment, net and other long-term liabilities in the Condensed Consolidated Balance Sheets. Leases with an initial term of 12 months or less are not recorded on the Condensed Consolidated Balance Sheets.
The Company has entered into leases for building facilities, vehicles and other equipment. The Company’s leases have remaining contractual terms of up to 10 years, some of which have options to extend the lease for up to 20 years. For purposes of calculating operating lease liabilities, lease terms are deemed not to include options to extend the lease termination until it is reasonably certain that the Company will exercise that option. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Supplemental unaudited consolidated balance sheet information related to leases is as follows:
 
 
Classification
 
December 31, 2019
(In thousands)
 
 
 
 
Operating lease assets
 
Right-of-use operating lease assets
 
$
19,696

Finance lease assets
 
Property, plant and equipment, net
 
34

Total lease assets
 
 
 
$
19,730

 
 
 
 
 
Operating lease liabilities - current
 
Operating lease liabilities - current
 
$
5,571

Operating lease liabilities - noncurrent
 
Operating lease liabilities - noncurrent
 
14,318

Finance lease liabilities
 
Other long-term liabilities
 
35

Total lease liabilities
 
 
 
$
19,924

The components of lease expense are as follows:
 
 
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
Classification
 
2019
 
2019
(In thousands)
 
 
 
 
 
 
Operating lease expense
 
General and administrative expenses and cost of goods sold
 
$
1,253

 
$
2,363

Finance lease expense:
 
 
 
 
 
 
Amortization of finance lease assets
 
General and administrative expenses
 
13

 
26

Interest on finance lease liabilities
 
Interest expense
 

 
1

Total lease expense
 
 
 
$
1,266

 
$
2,390


11


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


 
 
December 31, 2019
(In thousands)
 
Operating Leases
 
Finance Leases
Maturities of lease liabilities are as follows:
 
 
 
 
2020
 
$
2,826

 
$
27

2021
 
5,102

 
9

2022
 
3,631

 

2023
 
2,995

 

2024
 
2,699

 

Thereafter
 
5,375

 

Total lease payments
 
22,628

 
36

Less: interest
 
(2,739
)
 
(1
)
Total lease obligations
 
$
19,889

 
$
35

Lease term and discount rate:
 
 
December 31, 2019
Weighted-average remaining lease terms (in years):
 
 
Operating lease
 
8.8

Finance lease
 
0.7

 
 
 
Weighted-average discount rate:
 
 
Operating lease
 
4.50
%
Finance lease
 
4.50
%

Other Information:
 
 
Six Months Ended 
 December 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
2,165

Operating cash flows from finance leases
 
$
1

Financing cash flows from finance leases
 
$
25

 
 
 
Leased assets obtained in exchange for new finance lease liabilities
 
$

Leased assets obtained in exchange for new operating lease liabilities
 
$


Disclosures related to periods prior to adoption of ASU 2016-02
Rent expense paid for the fiscal year ended June 30, 2019 was $6.4 million.
The minimum annual payments under operating and capital leases as of June 30, 2019 are as follows: 

12


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


(In thousands)
 
Operating
 Lease
Obligations
 
Capital 
Lease
Obligations
Year Ended June 30,
 
 
 
 
2020
 
$
4,434

 
$
36

2021
 
3,238

 
1

2022
 
2,472

 

2023
 
2,131

 

2024
 
2,025

 

Thereafter
 
4,389

 

Total minimum lease payments
 
$
18,689

 
37

Less: imputed interest
(0.82% to 10.66%)
 
 
 
(2
)
Present value of future minimum lease payments
 
 
 
35

Less: current portion
 
 
 
(34
)
Long-term capital lease obligations
 
 
 
$
1






13


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


Note 4. Derivative Instruments
Derivative Instruments Held
Coffee-Related Derivative Instruments
The Company is exposed to commodity price risk associated with its price to fixed green coffee purchase contracts, which are described further in Note 2 to the consolidated financial statements in the 2019 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 December 31, 2019 and June 30, 2019:
(In thousands)
 
December 31, 2019
 
June 30, 2019
Derivative instruments designated as cash flow hedges:
 
 
 
 
  Long coffee pounds
 
40,725

 
42,113

Derivative instruments not designated as cash flow hedges:
 
 
 
 
  Long coffee pounds
 
1,238

 
6,070

      Total
 
41,963

 
48,183


Coffee-related derivative instruments designated as cash flow hedges outstanding as of December 31, 2019 will expire within 17 months. At December 31, 2019 and June 30, 2019 approximately 97% and 87%, respectively, of the Company's outstanding coffee-related derivative instruments were designated as cash flow hedges.

Interest Rate Swap Derivative Instruments
Pursuant to an International Swap Dealers Association, Inc. Master Agreement (“ISDA”) which was effective March 20, 2019, the Company on March 27, 2019, entered into an interest rate swap transaction utilizing a notional amount of $80.0 million, with an effective date of April 11, 2019 and a maturity date of October 11, 2023 (the “Rate Swap”). In December 2019, the Company amended the notional amount to $65.0 million. The Rate Swap is intended to manage the Company’s interest rate risk on its floating-rate indebtedness under the Company’s revolving credit facility. Under the terms of the Rate Swap, the Company receives 1-month LIBOR, subject to a 0% floor, and makes payments based on a fixed rate of 2.1975%. The Company’s obligations under the ISDA are secured by the collateral which secures the loans under the revolving credit facility on a pari passu and pro rata basis with the principal of such loans. The Company has designated the Rate Swap derivative instruments as a cash flow hedge.


14


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
 
 
December 31, 2019
 
June 30, 2019
 
December 31, 2019
 
June 30, 2019
(In thousands)
 
 
 
 
 
 
 
 
Financial Statement Location:
 
 
 
 
 
 
 
 
Short-term derivative assets:
 
 
 
 
 
 
 
 
Coffee-related derivative instruments(1)
 
$
8,718

 
$
1,254

 
$
333

 
$
611

Long-term derivative assets:
 
 
 
 
 
 
 
 
    Coffee-related derivative instruments (2)
 
$
443

 
$
671

 
$

 
$
3

Short-term derivative liabilities:
 
 
 
 
 
 
 
 
Coffee-related derivative instruments (3)
 
$
1

 
$
1,114

 
$
7

 
$
114

Interest rate swap derivative instruments (3)
 
$
360

 
$
246

 
$

 
$

Long-term derivative liabilities:
 
 
 
 
 
 
 
 
Coffee-related derivative instruments (4)
 
$

 
$
13

 
$

 
$

Interest rate swap derivative instruments (4)
 
$
1,069

 
$
1,599

 
$

 
$

________________
(1) Included in “Short-term derivative assets” on the Company’s condensed consolidated balance sheets.
(2) Included in “Long-term derivative assets” on the Company's condensed consolidated balance sheets.
(3) Included in “Short-term liabilities” on the Company's condensed consolidated balance sheets.
(4) Included in “Other long-term liabilities” on the Company's condensed consolidated balance sheets.
Statements of Operations
The following table presents pretax net gains and losses for the Company's derivative instruments designated as cash flow hedges, as recognized in “AOCI,” “Cost of goods sold” and “Other, net”.
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
Financial Statement Classification
(In thousands)
 
2019
 
2018
 
2019
 
2018
 
Net gains (losses) recognized in AOCI - Interest rate swap
 
$
448

 
$

 
$
(48
)
 
$

 
AOCI
Net losses recognized from AOCI to earnings - Interest rate swap
 
$
(52
)
 
$

 
$
(32
)
 
$

 
Interest Expense
Net losses reclassified from AOCI to earnings for partial unwind of our interest swap - Interest rate swap (1)
 
$
(407
)
 
$

 
$
(407
)
 
$

 
Interest Expense
Net gains (losses) recognized in AOCI - Coffee-related
 
$
12,130

 
$
1,005

 
$
7,431

 
$
(7,188
)
 
AOCI
Net losses recognized in earnings - Coffee - related
 
$
(3,451
)
 
$
(2,217
)
 
$
(6,922
)
 
$
(4,179
)
 
Cost of goods sold
________________
(1)
The $407 thousand of realized loss was due to partial unwinding of interest rate swap resulting from the amendment of the notional amount from $80 million to $65 million.
For the three and six months ended December 31, 2019 and 2018, there were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness.
Net losses (gains) on derivative instruments in the Company’s condensed consolidated statements of cash flows also include net losses (gains) on coffee-related derivative instruments designated as cash flow hedges reclassified to cost of goods sold from AOCI in the three and six months ended December 31, 2019 and 2018. Gains and losses on derivative instruments not designated as accounting hedges are included in “Other, net” in the Company’s condensed consolidated statements of

15


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


operations and in “Net losses (gains) on derivative instruments and investments” in the Company’s condensed consolidated statements of cash flows.
Net gains and losses recorded in “Other, net” are as follows:
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(In thousands)
 
2019
 
2018
 
2019
 
2018
Net losses on coffee-related derivative instruments(1)
 
$
419

 
$
(920
)
 
$
(624
)
 
$
(2,025
)
Non-operating pension and other postretirement benefit plans cost (2)
 
1,248

 
1,763

 
2,496

 
3,526

Other (losses) gains, net
 
(5
)
 
110

 
(7
)
 
109

             Other, net
 
$
1,662

 
$
953

 
$
1,865

 
$
1,610

___________
(1) Excludes net gains and losses on coffee-related derivative instruments designated as cash flow hedges recorded in cost of goods sold in the three and six months ended December 31, 2019 and 2018.
(2) Presented in accordance with ASU 2017-07.

Offsetting of Derivative Assets and Liabilities

The Company has agreements in place that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, under certain coffee derivative agreements, the Company maintains accounts with its counterparties to facilitate financial derivative transactions in support of its risk management activities.

The following table presents the Company’s net exposure from its offsetting derivative asset and liability positions, as well as cash collateral on deposit with its counterparties as of the reporting dates indicated:
(In thousands)
 
 
 
Gross Amount Reported on Balance Sheet
 
Netting Adjustments
 
Cash Collateral Posted
 
Net Exposure
December 31, 2019
 
Derivative Assets
 
$
9,494

 
$
(8
)
 
$

 
$
9,486

 
 
Derivative Liabilities
 
$
(1,437
)
 
$
(8
)
 
$

 
$
(1,445
)
June 30, 2019
 
Derivative Assets
 
$
2,539

 
$
(698
)
 
$

 
$
1,841

 
 
Derivative Liabilities
 
$
3,086

 
$
(698
)
 
$

 
$
2,388

Cash Flow Hedges
Changes in the fair value of the Company’s coffee-related derivative instruments designated as cash flow hedges are deferred in AOCI and subsequently reclassified into cost of goods sold in the same period or periods in which the hedged forecasted purchases affect earnings, or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. Based on recorded values at December 31, 2019, $5.2 million of net gains on coffee-related derivative instruments designated as a cash flow hedge are expected to be reclassified into cost of goods sold within the next twelve months. These recorded values are based on market prices of the commodities as of December 31, 2019.
Changes in the fair value of the Company's interest rate swap derivative instruments designated as a cash flow hedge are deferred in AOCI and subsequently reclassified into interest expense in the period or periods when the hedged transaction affects earnings or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. As of December 31, 2019, $0.4 million of net losses on interest rate swap derivative instruments designated as a cash flow hedge are expected to be reclassified into interest expense within the next twelve months assuming no significant changes in the LIBOR rates. Due to LIBOR volatility, actual gains or losses realized within the next twelve months will likely differ from these values.


16


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


Note 5. 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
December 31, 2019
 
 
 
 
 
 
 
 
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative assets (1)
 
$
9,161

 
$

 
$
9,161

 
$

Coffee-related derivative liabilities (1)
 
$
1

 
$

 
$
1

 
$

Interest rate swap derivative liabilities (2)
 
$
1,429

 
$

 
$
1,429

 
$

Derivative instruments not designated as accounting hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative assets(1)
 
$
333

 
$

 
$
333

 
$

Coffee-related derivative liabilities(1)
 
$
7

 
$

 
$
7

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
Total
 
Level 1
 
Level 2
 
Level 3
June 30, 2019
 
 
 
 
 
 
 
 
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative assets (1)
 
$
1,925

 
$

 
$
1,925

 
$

   Coffee-related derivative liabilities (1)
 
$
1,127

 
$

 
$
1,127

 
$

    Interest rate swap derivative liabilities (2)
 
$
1,845

 
$

 
$
1,845

 
$

Derivative instruments not designated as accounting hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative assets (1)
 
$
614

 
$

 
$
614

 
$

Coffee-related derivative liabilities (1)
 
$
114

 
$

 
$
114

 
$

____________________ 
(1)
The Company's coffee-related derivative instruments are traded over-the-counter and, therefore, classified as Level 2.
(2)
The Company's interest rate swap derivative instrument are model-derived valuations with directly or indirectly observable significant inputs such as interest rate and, therefore, classified as Level 2.

Note 6. Accounts Receivable, Net
(In thousands)
 
December 31, 2019
 
June 30, 2019
Trade receivables
 
$
57,652

 
$
53,593

Other receivables(1)
 
3,293

 
2,886

Allowance for doubtful accounts
 
(541
)
 
(1,324
)
    Accounts receivable, net
 
$
60,404

 
$
55,155

__________
(1) Includes vendor rebates and other non-trade receivables.
The $0.8 million decrease in the allowance for doubtful accounts during the six months ended December 31, 2019 was due to improvement of the Company’s accounts receivable aging balance.




17


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


Note 7. Inventories
(In thousands)
 
December 31, 2019
 
June 30, 2019
Coffee
 
 
 
 
   Processed
 
$
27,492

 
$
25,769

   Unprocessed
 
30,337

 
33,259

         Total
 
$
57,829

 
$
59,028

Tea and culinary products
 
 
 
 
   Processed
 
$
19,385

 
$
21,767

   Unprocessed
 
94

 
74

         Total
 
$
19,479

 
$
21,841

Coffee brewing equipment parts
 
$
7,826

 
$
7,041

              Total inventories
 
$
85,134

 
$
87,910


In addition to product cost, inventory costs include expenditures such as direct labor and certain supply, freight, warehousing, overhead variances, purchase price variance (“PPVs”) and other expenses incurred in bringing the inventory to its existing condition and location. The “Unprocessed” inventory values as stated in the above table represent the value of raw materials and the “Processed” inventory values represent all other products consisting primarily of finished goods.

Note 8. Property, Plant and Equipment
(In thousands)
 
December 31, 2019
 
June 30, 2019
Buildings and facilities (1)
 
$
100,316

 
$
107,915

Machinery and equipment (1)
 
243,397

 
249,477

Capitalized software
 
28,770

 
27,666

Office furniture and equipment
 
13,858

 
14,035

 
 
$
386,341

 
$
399,093

Accumulated depreciation
 
(227,671
)
 
(225,826
)
Land
 
13,313

 
16,191

Property, plant and equipment, net
 
$
171,983

 
$
189,458

__________
(1) Decrease as of December 31, 2019 is due to the sale of assets. See Note 21 for details.

Coffee Brewing Equipment (“CBE”) and Service
Capitalized CBE included in machinery and equipment above are:
(In thousands)
 
December 31, 2019
 
June 30, 2019
Coffee Brewing Equipment
 
$
103,520

 
$
106,593

Accumulated depreciation
 
(69,581
)
 
$
(70,202
)
  Coffee Brewing Equipment, net
 
$
33,939

 
$
36,391

 

18


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


Depreciation expense related to capitalized CBE and other CBE related expenses (excluding CBE depreciation) provided to customers and reported in cost of goods sold were as follows:
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(In thousands)
 
2019
 
2018
 
2019
 
2018
Depreciation expense
 
$
2,327

 
$
2,201

 
$
4,666

 
$
4,396

 
 
 
 
 
 
 
 
 
Other CBE expenses
 
$
8,446

 
$
8,410

 
$
16,171

 
$
16,916

Other expenses related to CBE provided to customers, such as the cost of servicing that equipment (including service employees’ salaries, cost of transportation and the cost of supplies and parts), are considered directly attributable to the generation of revenues from the customers. Therefore, these costs are included in cost of goods sold.

Note 9. Goodwill and Intangible Assets
There were no changes to the carrying value of goodwill in the six months ended December 31, 2019. The carrying value of goodwill at December 31, 2019 and June 30, 2019 was $36.2 million.
The following is a summary of the Company’s amortized and unamortized intangible assets other than goodwill:
 
 
 
 
 
December 31, 2019
 
June 30, 2019
 
 
(In thousands)
 
Weighted
Average
Amortization
Period as of
December 31, 2019
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net
Amortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
7.3
 
$
33,003

 
$
(16,391
)
 
$
16,612

 
$
33,003

 
$
(15,291
)
 
$
17,712

Non-compete agreements
 
2.2
 
220

 
(142
)
 
78

 
220

 
(122
)
 
98

Recipes
 
3.8
 
930

 
(420
)
 
510

 
930

 
(354
)
 
576

Trade name/brand name
 
4.5
 
510

 
(365
)
 
145

 
510

 
(346
)
 
164

Total amortized intangible assets
 
 
 
$
34,663

 
$
(17,318
)
 
$
17,345

 
$
34,663

 
$
(16,113
)
 
$
18,550

Unamortized intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks, trade names and brand name with indefinite lives
 
 
 
$
10,328

 
$

 
$
10,328

 
$
10,328

 
$

 
$
10,328

Total unamortized intangible assets
 
 
 
$
10,328

 
$

 
$
10,328

 
$