Company Quick10K Filing
Quick10K
Farmer Brothers
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$24.60 17 $418
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
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
MKC McCormick
SJM JM Smucker
CAG Conagra Brands
BG Bunge
LANC Lancaster Colony
BGS B&G Foods
TWNK Hostess Brands
SENEA Seneca Foods
LWAY Lifeway Foods
ANFI Amira Nature Foods
FARM 2018-12-31
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. 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 6. Exhibits
EX-3.3 farm-12312018xex33.htm
EX-10.15 farm-12312018xex1015.htm
EX-10.35 farm-12312018xex1035.htm
EX-10.43 farm-12312018xex1043.htm
EX-10.45 farm-12312018xex1045.htm
EX-10.46 farm-12312018xex1046.htm
EX-10.52 farm-12312018xex1052.htm
EX-10.53 farm-12312018xex1053.htm
EX-31.1 farm-12312018xex311.htm
EX-31.2 farm-12312018xex312.htm
EX-32.1 farm-12312018xex321.htm
EX-32.2 farm-12312018xex322.htm

Farmer Brothers Earnings 2018-12-31

FARM 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 farm-20181231x10q.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, 2018
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)
 
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 February 8, 2019, the registrant had 17,002,529 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, 2018
 
June 30, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
13,333

 
$
2,438

Accounts receivable, net
79,450

 
58,498

Inventories
115,540

 
104,431

Income tax receivable
324

 
305

Prepaid expenses
7,335

 
7,842

Total current assets
215,982

 
173,514

Property, plant and equipment, net
193,626

 
186,589

Goodwill
36,224

 
36,224

Intangible assets, net
30,179

 
31,515

Other assets
8,703

 
8,381

Deferred income taxes
43,343

 
39,308

Total assets
$
528,057

 
$
475,531

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
78,124

 
56,603

Accrued payroll expenses
17,176

 
17,918

Short-term borrowings under revolving credit facility

 
89,787

Short-term obligations under capital leases
103

 
190

Short-term derivative liabilities
4,201

 
3,300

Other current liabilities
8,448

 
10,659

Total current liabilities
108,052

 
178,457

Long-term borrowings under revolving credit facility
130,000

 

Accrued pension liabilities
47,593

 
40,380

Accrued postretirement benefits
18,336

 
20,473

Accrued workers’ compensation liabilities
4,938

 
5,354

Other long-term liabilities
813

 
1,812

Total liabilities
$
309,732

 
$
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 December 31, 2018 and June 30, 2018; liquidation preference of $15,355 and $15,089 as of December 31, 2018 and June 30, 2018, respectively
15

 
15

Common stock, $1.00 par value, 25,000,000 shares authorized; 17,002,529 and 16,951,659 shares issued and outstanding as of December 31, 2018 and June 30, 2018, respectively
17,002

 
16,952

Additional paid-in capital
56,135

 
55,965

Retained earnings
206,955

 
220,307

Unearned ESOP shares

 
(2,145
)
Accumulated other comprehensive loss
(61,782
)
 
(62,039
)
Total stockholders’ equity
$
218,325

 
$
229,055

Total liabilities and stockholders’ equity
$
528,057

 
$
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 December 31,
 
Six Months Ended December 31,
 
2018
 
2017
 
2018
 
2017
Net sales
$
159,773

 
$
167,366

 
$
307,213

 
$
299,079

Cost of goods sold
106,529

 
111,089

 
205,734

 
196,719

Gross profit
53,244

 
56,277

 
101,479

 
102,360

Selling expenses
39,591

 
42,127

 
76,901

 
74,984

General and administrative expenses
12,140

 
14,305

 
20,757

 
25,664

Restructuring and other transition expenses
207

 
139

 
4,674

 
259

Net gains from sale of spice assets
(138
)
 
(395
)
 
(390
)
 
(545
)
Net losses from sales of other assets
942

 
91

 
1,113

 
144

Operating expenses
52,742

 
56,267

 
103,055

 
100,506

Income (loss) from operations
502

 
10

 
(1,576
)
 
1,854

Other (expense) income:
 
 
 
 
 
 
 
Dividend income

 
6

 

 
11

Interest income

 
1

 

 
2

Interest expense
(3,332
)
 
(2,506
)
 
(6,184
)
 
(4,674
)
Pension settlement charge
(10,948
)
 

 
(10,948
)
 

Other, net
953

 
2,217

 
1,610

 
3,967

Total other expense
(13,327
)
 
(282
)
 
(15,522
)
 
(694
)
(Loss) income before taxes
(12,825
)
 
(272
)
 
(17,098
)
 
1,160

Income tax (benefit) expense
(2,725
)
 
16,788

 
(4,012
)
 
17,380

Net loss
$
(10,100
)
 
$
(17,060
)
 
$
(13,086
)
 
$
(16,220
)
Less: Cumulative preferred dividends, undeclared and unpaid
134

 
129

 
266

 
129

Net loss available to common stockholders
$
(10,234
)
 
$
(17,189
)
 
$
(13,352
)
 
$
(16,349
)
Net loss available to common stockholders per common share—basic
$
(0.60
)
 
$
(1.03
)
 
$
(0.79
)
 
$
(0.98
)
Net loss available to common stockholders per common share—diluted
$
(0.60
)
 
$
(1.03
)
 
$
(0.79
)
 
$
(0.98
)
Weighted average common shares outstanding—basic
16,985,157

 
16,723,498

 
16,971,995

 
16,711,660

Weighted average common shares outstanding—diluted
16,985,157

 
16,723,498

 
16,971,995

 
16,711,660


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,
 
2018
 
2017
 
2018
 
2017
Net loss
$
(10,100
)
 
$
(17,060
)
 
$
(13,086
)
 
$
(16,220
)
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) on derivative instruments designated as cash flow hedges, net of tax
748

 
(1,279
)
 
(5,349
)
 
(1,707
)
Losses (gains) on derivative instruments designated as cash flow hedges reclassified to cost of goods sold, net of tax
1,650

 
64

 
3,110

 
(708
)
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 loss, net of tax
$
(5,206
)
 
$
(18,275
)
 
$
(12,829
)
 
$
(18,635
)

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




3



 
FARMER BROS. CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Six Months Ended December 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net loss
$
(13,086
)
 
$
(16,220
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
Depreciation and amortization
15,630

 
15,330

Provision for doubtful accounts
1,637

 
129

Restructuring and other transition expenses, net of payments
2,457

 
(958
)
Deferred income taxes
(3,265
)
 
16,555

Pension settlement charge
10,948

 

Net losses (gains) from sales of spice assets and other assets
723

 
(401
)
ESOP and share-based compensation expense
1,857

 
1,844

Net losses (gains) on derivative instruments and investments
6,205

 
(726
)
Change in operating assets and liabilities:
 
 
 
Proceeds from sales of trading securities

 
375

Accounts receivable
(21,299
)
 
(8,102
)
Inventories
(11,326
)
 
(6,629
)
Income tax receivable
(19
)
 
112

Derivative assets (liabilities), net
(9,234
)
 
(3,038
)
Prepaid expenses and other assets
1,213

 
352

Accounts payable
21,534

 
1,302

Accrued payroll expenses and other current liabilities
(5,458
)
 
1,178

Accrued postretirement benefits
(2,137
)
 
(676
)
Other long-term liabilities
(2,026
)
 
(1,960
)
Net cash used in operating activities
$
(5,646
)
 
$
(1,533
)
Cash flows from investing activities:
 
 
 
Acquisition of businesses, net of cash acquired
$

 
$
(39,608
)
Purchases of property, plant and equipment
(23,120
)
 
(14,672
)
Purchases of assets for construction of New Facility

 
(1,577
)
Proceeds from sales of property, plant and equipment
105

 
85

Net cash used in investing activities
$
(23,015
)
 
$
(55,772
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility
$
40,642

 
$
69,758

Repayments on revolving credit facility
(429
)
 
(12,949
)
Payments of capital lease obligations
(137
)
 
(591
)
Payment of financing costs
(1,027
)
 
(365
)
Proceeds from stock option exercises
507

 
625

Net cash provided by financing activities
$
39,556

 
$
56,478

Net increase (decrease) in cash and cash equivalents
$
10,895

 
$
(827
)
Cash and cash equivalents at beginning of period
2,438

 
6,241

Cash and cash equivalents at end of period
$
13,333

 
$
5,414




4



 
Six Months Ended December 31,
 
2018
 
2017
Supplemental disclosure of non-cash investing and financing activities:
 
 
 
        Net change in derivative assets and liabilities
           included in other comprehensive loss, net of tax
$
(2,239
)
 
$
(2,415
)
    Non-cash additions to property, plant and equipment
$
2,928

 
$
557

    Non-cash portion of earnout receivable recognized—spice assets sale
$
390

 
$
545

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

 
$
218

    Non-cash portion of earnout payable recognized—West Coast Coffee
$
840

 
$

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

 
$
11,756

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

 
$
1,056

    Cumulative preferred dividends, undeclared and unpaid
$
266

 
$
129


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


5




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, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2019. Events occurring subsequent to December 31, 2018 have been evaluated for potential recognition or disclosure in the unaudited condensed consolidated financial statements for the three and six months ended December 31, 2018.
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.
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.
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 six months ended December 31, 2018, 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.

6


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


Concentration of Credit Risk
At December 31, 2018 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.
At December 31, 2018 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 the Company's broker and counterparty agreements.
Approximately 29% and 20% of the Company’s trade accounts receivable balance was with five customers at December 31, 2018 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 equipment depreciation as well as the cost of servicing that equipment (including service employees’ salaries, cost of transportation and the cost of supplies and parts) and are considered directly attributable to the generation of revenues from its customers. Accordingly, such costs included in cost of goods sold in the accompanying unaudited condensed consolidated financial statements in the three months ended December 31, 2018 and 2017 were $8.4 million and $7.1 million, respectively. Coffee brewing costs included in cost of goods sold in the accompanying unaudited condensed consolidated financial statements in the six months ended December 31, 2018 and 2017 were $16.9 million and $13.5 million, respectively.
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 as 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 $3.5 million and $3.3 million, respectively, in the three months ended December 31, 2018 and 2017. Shipping and handling costs that were recorded as a component of the Company's selling expenses were $6.6 million and $5.1 million, respectively, in the six months ended December 31, 2018 and 2017.
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.

7


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


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 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.
Recently Adopted Accounting Standards
In March 2018, the Financial Accounting Standards Board ("FASB") issued ASU 2018-05. ASU 2018-05 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. ASU 2017-07 amends the requirements in GAAP related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. 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 $1.6 million in each of the three months ended December 31, 2018 and 2017, and “Other, net” increased by $1.8 million and $1.7 million in the three months ended December 31, 2018 and 2017, respectively. “Interest expense” increased by $3.3 million in each of the six months ended December 31, 2018 and 2017, and “Other, net” increased by $3.5 million and $3.3 million in the six months ended December 31, 2018 and 2017, 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. The amendments in ASU 2017-01 clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses and provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace the missing elements. The guidance in ASU 2017-01 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, and should be applied prospectively. The Company

8


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


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. The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. 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. ASU 2016-15 addresses certain issues where diversity in practice was identified in classifying certain cash receipts and cash payments based on the guidance in ASC 230, “Statement of Cash Flows” (“ASC 230”). ASC 230 is principles based and often requires judgment to determine the appropriate classification of cash flows as operating, investing or financing activities. The application of judgment has resulted in diversity in how certain cash receipts and cash payments are classified. Certain cash receipts and cash payments may have aspects of more than one class of cash flows. ASU 2016-15 clarifies that an entity will first apply any relevant guidance in ASC 230 and in other applicable topics. If there is no guidance that addresses those cash receipts and cash payments, an entity will determine each separately identifiable source or use and classify the receipt or payment based on the nature of the cash flow. If a receipt or payment has aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. The guidance in ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU 2016-15 beginning July 1, 2018. Adoption of ASU 2016-15 did not have a material effect on the results of operations, financial position or cash flows of the Company.
In May 2014, the FASB issued accounting guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers under ASU 2014-09. 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

9


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


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 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 in the process of evaluating the provisions of ASU 2016-02 and assessing its impact on the Company’s financial statements, information systems, business processes, and financial statement disclosures. The Company is implementing a project plan related to ASU 2016-02 and is identifying the lease population. 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. The Company will continue to evaluate the impact of the adoption of ASU 2016-02.
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.

10


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


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 six months ended December 31, 2017 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 six months ended December 31, 2018, 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.

The following table presents the impact of these changes on the Company's condensed consolidated statement of operations for the three months ended December 31, 2017:

 
 
Three Months Ended December 31, 2017
(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
 
$
101,847

 
$
2,330

 
$
5,226

 
$
1,772

 
$
(86
)
 
$
111,089

Gross profit
 
$
65,519

 
$
(2,330
)
 
$
(5,226
)
 
$
(1,772
)
 
$
86

 
$
56,277

Selling expenses
 
$
49,328

 
$

 
$
(5,878
)
 
$
(1,036
)
 
$
(287
)
 
$
42,127

General and administrative expenses
 
$
13,914

 
$

 
$

 
$

 
$
391

 
$
14,305

Operating expenses
 
$
63,077

 
$

 
$
(5,878
)
 
$
(1,036
)
 
$
104

 
$
56,267

Income from operations
 
$
2,442

 
$
(2,330
)
 
$
652

 
$
(736
)
 
$
(18
)
 
$
10

Interest expense
 
$
(861
)
 
$

 
$

 
$

 
$
(1,645
)
 
$
(2,506
)
Other, net
 
$
554

 
$

 
$

 
$

 
$
1,663

 
$
2,217

Total other expense
 
$
(300
)
 
$

 
$

 
$

 
$
18

 
$
(282
)
Income (loss) before taxes
 
$
2,142

 
$
(2,330
)
 
$
652

 
$
(736
)
 
$

 
$
(272
)
Income tax expense
 
$
20,910

 
$
(3,978
)
 
$
1,113

 
$
(1,257
)
 
$

 
$
16,788

Net loss
 
$
(18,768
)
 
$
1,648

 
$
(461
)
 
$
521

 
$

 
$
(17,060
)
Net loss available to common stockholders
 
$
(18,897
)
 
$
1,648

 
$
(461
)
 
$
521

 
$

 
$
(17,189
)
Net loss available to common stockholders per common share—basic
 
$
(1.13
)
 
$
0.10

 
$
(0.03
)
 
$
0.03

 
$

 
$
(1.03
)
Net loss available to common stockholders per common share—diluted
 
$
(1.13
)
 
$
0.10

 
$
(0.03
)
 
$
0.03

 
$

 
$
(1.03
)
_____________
(1) Reflects changes resulting from the adoption of ASU 2017-07. See Note 2.

11


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 six months ended December 31, 2017:
 
Six Months Ended December 31, 2017
(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
$
184,553

 
$
1,885

 
$
9,689

 
$
721

 
$
(129
)
 
$
196,719

Gross profit
$
114,526

 
$
(1,885
)
 
$
(9,689
)
 
$
(721
)
 
$
129

 
$
102,360

Selling expenses
$
88,243

 
$

 
$
(10,923
)
 
$
(2,078
)
 
$
(258
)
 
$
74,984

General and administrative expenses
$
25,241

 
$

 
$

 
$

 
$
423

 
$
25,664

Operating expenses
$
113,342

 
$

 
$
(10,923
)
 
$
(2,078
)
 
$
165

 
$
100,506

Income from operations
$
1,184

 
$
(1,885
)
 
$
1,234

 
$
1,357

 
$
(36
)
 
$
1,854

Interest expense
$
(1,384
)
 
$

 
$

 
$

 
$
(3,290
)
 
$
(4,674
)
Other, net
$
641

 
$

 
$

 
$

 
$
3,326

 
$
3,967

Total other expense
$
(730
)
 
$

 
$

 
$

 
$
36

 
$
(694
)
Income before taxes
$
454

 
$
(1,885
)
 
$
1,234

 
$
1,357

 
$

 
$
1,160

Income tax expense
$
20,200

 
$
(3,370
)
 
$
1,264

 
$
(714
)
 
$

 
$
17,380

Net loss
$
(19,746
)
 
$
1,485

 
$
(30
)
 
$
2,071

 
$

 
$
(16,220
)
Net loss available to common stockholders
$
(19,875
)
 
$
1,485

 
$
(30
)
 
$
2,071

 
$

 
$
(16,349
)
Net loss available to common stockholders per common share—basic
$
(1.19
)
 
$
0.09

 

 
$
0.12

 
$

 
$
(0.98
)
Net loss available to common stockholders per common share—diluted
$
(1.19
)
 
$
0.09

 
$

 
$
0.12

 
$

 
$
(0.98
)
___________________
(1) Reflects changes resulting from the adoption of ASU 2017-07. See Note 2.

12


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 six months ended December 31, 2017:
 
 
Six Months Ended December 31, 2017
(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
 
$
(19,746
)
 
$
1,485

 
$
(30
)
 
$
2,071

 
$
(16,220
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
 
 
 
 
 
 
 
Deferred income taxes
 
$
19,375

 
$
(3,370
)
 
$
1,264

 
$
(714
)
 
$
16,555

Net losses (gains) on derivative instruments and investments
 
$
1,033

 
$
(1,759
)
 
$

 
$

 
$
(726
)
Change in operating assets and liabilities:
Inventories
 
$
(7,682
)
 
$
3,644

 
$
(1,234
)
 
$
(1,357
)
 
$
(6,629
)
Derivative assets (liabilities), net
 
$
(3,000
)
 
$
(38
)
 
$

 
$

 
$
(3,038
)
Accounts payable
 
$
1,264

 
$
38

 
$

 
$

 
$
1,302



The impacts shown above have also been reflected in the Company’s condensed consolidated statements of comprehensive loss for the three and six months ended December 31, 2017 as follows:
 
Three Months Ended
December 31, 2017
 
Six Months Ended
December 31, 2017
(In thousands)
As Previously Reported
 
Retrospectively Adjusted
 
As Previously Reported
 
Retrospectively Adjusted
Net loss
$
(18,768
)
 
$
(17,060
)
 
$
(19,746
)
 
$
(16,220
)
Unrealized losses on derivative instruments designated as cash flow hedges, net of tax
$
(1,279
)
 
$
(1,279
)
 
$
(1,711
)
 
$
(1,707
)
Losses (gains) on derivative instruments designated as cash flow hedges reclassified to cost of goods sold, net of tax
$
365

 
$
64

 
$
369

 
$
(708
)
Total comprehensive loss, net of tax
$
(19,682
)
 
$
(18,275
)
 
$
(21,088
)
 
$
(18,635
)

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.

13


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


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. Any Holdback Cash Amount and Holdback Stock not used to satisfy indemnification claims (including pending claims) will be released to the Seller on the 18-month anniversary of the Closing Date.
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 sheets in “Other current liabilities” and “Other long-term liabilities” at December 31, 2018 and June 30, 2018, respectively. See Note 16 and 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 paid from the Multiemployer Plan Holdback. See Note 23.
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 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. See Note 23.
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

 
 

14


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


______________
(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.
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 six months ended December 31, 2018 (unaudited):
(In thousands)
Three Months Ended
 
Six Months Ended
 
December 31, 2018
 
December 31, 2018
Net sales
$
24,081

 
$
44,584

Income before taxes
$
3,505

 
$
4,216

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 six months ended December 31, 2018 and 2017, 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 December 31,
 
Six Months Ended December 31,
 
 
2018
 
2017
 
2018
 
2017
(In thousands)
 
 
 
 
 
 
 
 
Net sales
 
$
159,773

 
$
167,366

 
$
307,213

 
321,061

(Loss) income before taxes
 
$
(12,825
)
 
$
2,142

 
$
(17,098
)
 
3,900

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 three and six months ended December 31, 2018 and $9.2 million in the three and six months ended December 31, 2017. The transition services and co-manufacturing agreements expired on October 2, 2018.
The Company has incurred acquisition and integration costs related to the Boyd Business acquisition, consisting primarily of legal and consulting expenses, Boyd Coffee plant decommissioning and equipment relocation costs, and one-time payroll and benefit expenses of $2.7 million and $1.0 million during the three months ended December 31, 2018 and

15


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


2017, respectively, and $3.7 million and $3.4 million during the six months ended December 31, 2018 and 2017, respectively. These expenses are included in operating expenses in the Company's condensed consolidated statements of operations.

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 three and six months ended December 31, 2018, 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 $0.8 million and has outstanding contractual obligations of $2.6 million as of December 31, 2018 (see Note 22).
Since the adoption of the Corporate Relocation Plan through December 31, 2018, 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 December 31, 2018 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 $0.2 million and $0, in employee-related costs and $0 and $0.1 million, in other related costs for three months ended December 31, 2018 and 2017, respectively, and $1.2 million and $24,000, in employee-related costs and $0.2 million and $0.2 million, in other related costs for the six months ended December 31, 2018 and 2017, respectively. Since the adoption of the DSD Restructuring Plan through December 31, 2018, the Company has recognized a total of $4.4 million in aggregate cash costs including $2.5 million in employee-related costs, and $1.9 million in other related costs. As of December 31, 2018, the Company had paid a total of $4.2 million of these costs, and had a balance of $0.3 million in DSD Restructuring Plan-related liabilities on the Company’s condensed consolidated balance sheet. The remaining costs are expected to be incurred in the remainder of fiscal 2019.
Note 6. Derivative Instruments
Derivative Instruments Held

16


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


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 December 31, 2018 and June 30, 2018:
(In thousands)
 
December 31, 2018
 
June 30, 2018
Derivative instruments designated as cash flow hedges:
 
 
 
 
  Long coffee pounds
 
31,350

 
40,913

Derivative instruments not designated as cash flow hedges:
 
 
 
 
  Long coffee pounds
 
7,145

 
2,546

      Total
 
38,495

 
43,459

Coffee-related derivative instruments designated as cash flow hedges outstanding as of December 31, 2018 will expire within 18 months.
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, 2018
 
June 30, 2018
 
December 31, 2018
 
June 30, 2018
(In thousands)
 
 
 
 
 
 
 
 
Financial Statement Location:
 
 
 
 
 
 
 
 
Short-term derivative assets(1):
 
 
 
 
 
 
 
 
Coffee-related derivative instruments
 
$
5

 
$

 
$
12

 
$

Short-term derivative liabilities(1):
 
 
 
 
 
 
 
 
Coffee-related derivative instruments
 
$
2,661

 
$
3,081

 
$
1,557

 
$
219

Long-term derivative liabilities(2):
 
 
 
 
 
 
 
 
Coffee-related derivative instruments
 
$
322

 
$
386

 
$

 
$

________________
(1) Included in “Short-term derivative liabilities” on the Company’s condensed consolidated balance sheets.
(2) Included in “Other long-term liabilities” on the Company’s condensed consolidated balance sheets.

17


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


Statements of Operations
The following table presents pretax net gains and losses on coffee-related derivative instruments designated as cash flow hedges, as recognized in accumulated other comprehensive income (loss) “AOCI” and “Cost of goods sold” (prior period amounts have been retrospectively adjusted to reflect the impact of certain changes in accounting principles and corrections to previously issued financial statements as described in Note 3).
 
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
Financial Statement Classification
(In thousands)
 
2018
 
2017
 
2018
 
2017
 
Net gains (losses) recognized in AOCI
 
$
1,005

 
$
(2,094
)
 
$
(7,188
)
 
$
(2,453
)
 
AOCI
Net losses recognized in earnings
 
$
(2,217
)
 
$
(105
)
 
$
(4,179
)
 
$
1,161

 
Costs of goods sold
For the three and six months ended December 31, 2018 and 2017, there were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness or as a result of reclassifications to earnings following the discontinuance of any cash flow hedges.
Net gains on derivative instruments and investments in the Company’s condensed consolidated statements of cash flows also include net gains and losses 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, 2018 and 2017. Gains and losses on derivative instruments not designated as accounting hedges are included in “Other, net” in the Company’s condensed consolidated statements of 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)
 
2018
 
2017
 
2018
 
2017
Net losses on coffee-related derivative instruments(1)
 
$
(920
)
 
$
(190
)
 
$
(2,025
)
 
$
(93
)
Net gains on investments
 

 
16

 

 
7

Non-operating pension and other postretirement benefit plans cost(2)
 
1,763

 
1,663

 
3,526

 
3,326

Other gains, net
 
110

 
728

 
109

 
727

             Other, net
 
$
953

 
$
2,217

 
$
1,610

 
$
3,967

___________
(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, 2018 and 2017.
(2) Presented in accordance with newly implemented ASU 2017-07. See Note 2.


Offsetting of Derivative Assets and Liabilities
The Company has agreements in place that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, the Company maintains accounts with its brokers to facilitate financial derivative transactions in support of its risk management activities. Based on the value of the Company’s positions in these accounts and the associated margin requirements, the Company may be required to deposit cash into these broker accounts.

18


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


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, 2018
 
Derivative Assets
 
$
17

 
$
(17
)
 
$

 
$

 
 
Derivative Liabilities
 
$
4,540

 
$
17

 
$

 
$
4,557

June 30, 2018
 
Derivative Assets
 
$

 
$

 
$

 
$

 
 
Derivative Liabilities
 
$
3,686

 
$

 
$

 
$
3,686

Cash Flow Hedges
Changes in the fair value of the Company’s coffee-related derivative instruments designated as cash flow hedges, to the extent effective, are deferred in AOCI and reclassified into cost of goods sold in the same period or periods in which the hedged forecasted purchases affect earnings, or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. Based on recorded values at December 31, 2018, $(9.7) million of net losses on coffee-related derivative instruments designated as cash flow hedges are expected to be reclassified into cost of goods sold within the next twelve months. These recorded values are based on market prices of the commodities as of December 31, 2018. Due to the volatile nature of commodity prices, actual gains or losses realized within the next twelve months will likely differ from these values. At December 31, 2018 and June 30, 2018 approximately 81% and 94%, respectively, of the Company's outstanding coffee-related derivative instruments were designated as cash flow hedges.
Note 7. 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, 2018
 
 
 
 
 
 
 
 
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative assets(1)
 
$
5

 
$

 
$
5

 
$

Coffee-related derivative liabilities(1)
 
$
2,983

 
$

 
$
2,983

 
$

Derivative instruments not designated as accounting hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative assets(1)
 
$
12

 
$

 
$
12

 
$

Coffee-related derivative liabilities(1)
 
$
1,557

 
$

 
$
1,557

 
$

 
 
 
 
 
 
 
 
 
(In thousands)
 
Total
 
Level 1
 
Level 2
 
Level 3
June 30, 2018
 
 
 
 
 
 
 
 
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative liabilities(1)
 
$
3,467

 
$

 
$
3,467

 
$

Derivative instruments not designated as accounting hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative liabilities(1)
 
$
219

 
$

 
$
219

 
$

____________________ 
(1)
The Company’s coffee-related derivative instruments are traded over-the-counter and, therefore, classified as Level 2.
Note 8. Accounts Receivable, Net
(In thousands)
 
December 31, 2018
 
June 30, 2018
Trade receivables
 
$
76,738

 
$
54,547

Other receivables(1)
 
4,551

 
4,446

Allowance for doubtful accounts
 
(1,839
)
 
(495
)
    Accounts receivable, net
 
$
79,450

 
$
58,498

__________
(1) Includes vendor rebates, earn out receivables and other non- trade receivables.

19


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


    
The $1.3 million increase in the allowance for doubtful accounts during the six months ended December 31, 2018 was due to bad debt expense of $1.6 million associated with an increase in aging receivables offset by net accounts receivable write-offs of $0.3 million.



Note 9. Inventories
(In thousands)
 
December 31, 2018
 
June 30, 2018
Coffee
 
 
 
 
   Processed
 
$
32,933

 
$
26,882

   Unprocessed
 
42,165

 
37,097

         Total
 
$
75,098

 
$
63,979

Tea and culinary products
 
 
 
 
   Processed
 
$
33,847

 
$
32,406

   Unprocessed
 
102

 
1,161

         Total
 
$
33,949

 
$
33,567

Coffee brewing equipment parts
 
$
6,493

 
$
6,885

              Total inventories
 
$
115,540

 
$
104,431


In addition to product cost, inventory costs include expenditures such as direct labor and certain supply, freight, warehousing, overhead variances, PPVs and other expenses incurred in bringing the inventory to its existing condition and location. See Note 3. 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 10. Property, Plant and Equipment
(In thousands)
 
December 31, 2018
 
June 30, 2018
Buildings and facilities
 
$
108,675

 
$
108,590

Machinery and equipment
 
245,858

 
231,581

Equipment under capital leases
 
1,369

 
1,408

Capitalized software
 
26,070

 
24,569

Office furniture and equipment
 
13,795

 
13,721

 
 
$
395,767

 
$
379,869

Accumulated depreciation
 
(218,359
)
 
(209,498
)
Land
 
16,218

 
16,218

Property, plant and equipment, net
 
$
193,626

 
$
186,589

The Company capitalized coffee brewing equipment (included in machinery and equipment) in the amounts of $8.9 million and $4.8 million in the six months ended December 31, 2018 and 2017, respectively. Depreciation expense related to capitalized coffee brewing equipment reported in cost of goods sold was $2.2 million and $2.3 million in the three months ended December 31, 2018 and 2017, respectively, and $4.4 million in each of the six months ended December 31, 2018 and 2017.
Note 11. Goodwill and Intangible Assets
There were no changes to the carrying value of goodwill in the six months ended December 31, 2018. The carrying value of goodwill at December 31, 2018 and June 30, 2018 was $36.2 million.

20


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


The following is a summary of the Company’s amortized and unamortized intangible assets other than goodwill:
 
 
 
December 31, 2018
 
June 30, 2018
(In thousands)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Gross Carrying
Amount
 
Accumulated
Amortization
Amortized intangible assets:
 
 
 
 
 
 
 
 
Customer relationships
 
$
33,003

 
$
(14,096
)
 
$
33,003

 
$
(12,903
)
Non-compete agreements
 
220

 
(102
)
 
220

 
(81
)
Recipes
 
930

 
(287
)
 
930

 
(221
)
Trade name/brand name
 
510

 
(327
)
 
510

 
(271
)
Total amortized intangible assets
 
$
34,663

 
$
(14,812
)
 
$
34,663

 
$
(13,476
)
Unamortized intangible assets:
 
 
 
 
 
 
 
 
Trademarks, trade names and brand name with indefinite lives
 
$
10,328

 
$

 
$
10,328

 
$

Total unamortized intangible assets
 
$
10,328

 
$

 
$
10,328

 
$

     Total intangible assets
 
$
44,991

 
$
(14,812
)
 
$
44,991

 
$
(13,476
)
Aggregate amortization expense for the three months ended December 31, 2018 and 2017 was $0.7 million and $1.1 million, respectively. Aggregate amortization expense for the six months ended December 31, 2018 and 2017 was $1.3 million and $1.4 million, respectively.
Note 12. Employee Benefit Plans
The Company provides benefit plans for full-time employees who work 30 hours or more per week, including 401(k), health and other welfare benefit plans and, in certain circumstances, pension benefits. Generally, the plans provide health benefits after 30 days and other retirement benefits based on years of service and/or a combination of years of service and earnings. In addition, the Company contributes to two multiemployer defined benefit pension plans, one multiemployer defined contribution pension plan and nine multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. In addition, the Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees and provides retiree medical coverage and, depending on the age of the retiree, dental and vision coverage. The Company also provides a postretirement death benefit to certain of its employees and retirees.
The Company is required to recognize the funded status of a benefit plan in its consolidated balance sheets. The Company is also required to recognize in other comprehensive income (“OCI”) certain gains and losses that arise during the period but are deferred under pension accounting rules.
Single Employer Pension Plans
As of December, 31, 2018, the Company has two defined benefit pension plans for certain employees (the “Brewmatic Plan” and the “Hourly Employees’ Plan”). Effective October 1, 2016, the Company froze benefit accruals and participation in the Hourly Employees’ Plan. After the plan freeze, participants do not accrue any benefits under the plan, and new hires are not eligible to participate in the plan.
 
Effective December 1, 2018 the Company amended and terminated the Farmer Bros. Co. Pension Plan for Salaried Employees (the “Farmer Bros. Plan”), a defined benefit pension plan for Company employees hired prior to January 1, 2010 who were not covered under a collective bargaining agreement. The Company previously amended the Farmer Bros. Plan, freezing the benefit for all participants effective June 30, 2011.

Immediately prior to the termination of the Farmer Bros. Plan, the Company spun off the benefit liability and obligations, and all allocable assets for all retirement plan benefits of certain active employees with accrued benefits in excess of $25,000, retirees and beneficiaries currently receiving benefit payments under the Farmer Bros. Plan, and former employees who have deferred vested benefits under the Farmer Bros. Plan to the Brewmatic Plan. Upon termination of the Farmer Bros. Plan, all remaining plan participants elected to receive a distribution of his/her entire accrued benefit under the

21


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


Farmer Bros. Plan in a single cash lump sum or an individual insurance company annuity contract, in either case, funded directly by Farmer Bros. Plan assets.

Termination of the Farmer Bros. Plan triggered re-measurement and settlement of the Farmer Bros. Plan and re-measurement of the Brewmatic Plan. As a result of the distributions to the remaining plan participants of the Farmer Bros. Plan, the Company reduced its overall pension projected benefit obligation by approximately $24.4 million and recognized a non-cash pension settlement charge of $8.1 million after-tax ($10.9 million pretax) in the three and six months ended December 31, 2018. After the re-measurement and settlement, the new projected benefit obligation and fair value of plan assets for the Brewmatic Plan are $114.1 million and $67.4 million, respectively, resulting in a net underfunded status of $46.7 million as of December 31, 2018. This represents a $6.7 million increase from the net underfunded status of the Farmer Bros. Plan and Brewmatic Plan as of June 30, 2018 primarily due to actual losses recognized on plan assets during the six months ended December 31, 2018. The Hourly Employees’ Plan was not impacted by this transaction.

The net periodic benefit cost for the defined benefit pension plans is as follows:
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
2018
 
2017
 
2018
 
2017
(In thousands)
 
 
 
 
Service cost
 
$

 
$

 
$

 
$

Interest cost
 
1,426

 
1,432

 
2,852

 
2,864

Expected return on plan assets
 
(1,485
)
 
(1,456
)
 
(2,970
)
 
(2,912
)
Amortization of net loss(1)
 
370

 
418

 
740

 
836

Pension settlement charge
 
10,948

 

 
10,948

 

Net periodic benefit cost
 
$
11,259

 
$
394

 
$
11,570

 
$
788

___________
(1) These amounts represent the estimated portion of the net loss in AOCI that is expected to be recognized as a component of net periodic benefit cost over the current fiscal year. 
On July 1, 2018, the Company adopted 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. See Note 2.
Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost
 
 
Fiscal
 
 
2019
 
2018
Discount rate
 
4.05%
 
3.80%
Expected long-term return on plan assets
 
6.75%
 
6.75%
 
Basis Used to Determine Expected Long-Term Return on Plan Assets
The expected long-term return on plan assets assumption was developed as a weighted average rate based on the target asset allocation of the plan and the Long-Term Capital Market Assumptions (CMA) 2016. The capital market assumptions were developed with a primary focus on forward-looking valuation models and market indicators. The key fundamental economic inputs for these models are future inflation, economic growth, and interest rate environment. Due to the long-term nature of the pension obligations, the investment horizon for the CMA 2016 is 20 to 30 years. In addition to forward-looking models, historical analysis of market data and trends was reflected, as well as the outlook of recognized economists, organizations and consensus CMA from other credible studies.
Multiemployer Pension Plans
The Company participates in two multiemployer defined benefit pension plans that are union sponsored and collectively bargained for the benefit of certain employees subject to collective bargaining agreements, of which the WCTPP is individually significant. The Company makes contributions to these plans generally based on the number of hours worked by the participants in accordance with the provisions of negotiated labor contracts.

22


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


The risks of participating in multiemployer pension plans are different from single-employer plans in that: (i) assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (iii) if the Company stops participating in the multiemployer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
On October 30, 2017, counsel to the Company received written confirmation that the WCT Pension Trust will be retracting its claim, stated in its letter to the Company dated July 10, 2017 (the “WCT Pension Trust Letter”), that certain of the Company’s employment actions in 2015 resulting from the Corporate Relocation Plan constituted a partial withdrawal from the WCTPP.  The written confirmation stated that the WCT Pension Trust has determined that a partial withdrawal did not occur in 2015 and further stated that the withdrawal liability assessment has been rescinded.  This rescinding of withdrawal liability assessment applied to Company employment actions in 2015 with respect to the bargaining units that were specified in the WCT Pension Trust Letter.
The Company received a letter dated July 10, 2018 from the WCT Pension Trust assessing withdrawal liability against the Company for a share of the WCTPP unfunded vested benefits, on the basis claimed by the WCT Pension Trust that employment actions by the Company in 2016 in connection with the Corporate Relocation Plan constituted a partial withdrawal from the WCTPP. The Company agreed with the WCT Pension Trust’s assessment of pension withdrawal liability in the amount of $3.4 million, including interest, which is payable in 17 monthly installments of $190,507 followed by a final monthly installment of $153,822, commencing September 10, 2018. At December 31, 2018 the Company had recorded $2.6 million on its condensed consolidated balance sheet relating to this obligation, with the current portion included in “Accrued payroll expenses” and the long-term portion included in “Accrued pension liabilities.” See Note 22.
In fiscal 2012, the Company withdrew from the Local 807 Labor-Management Pension Fund (“Local 807 Pension Fund”) and recorded a charge of $4.3 million associated with withdrawal from this plan, representing the present value of the estimated withdrawal liability expected to be paid in quarterly installments of $0.1 million over 80 quarters. On November 18, 2014, the Local 807 Pension Fund sent the Company a notice of assessment of withdrawal liability in the amount of $4.4 million, which the Local 807 Pension Fund adjusted to $4.9 million on January 5, 2015. The Company commenced quarterly installment payments to the Local 807 Pension Fund of $91,000 pending the final settlement of the liability. The Company recorded $3.8 million in “Other current liabilities” on its consolidated balance sheet at June 30, 2018 representing the present value of the Company’s estimated withdrawal liability at June 30, 2018.
During the three months ended December 31, 2018, the parties agreed to settle the Company’s remaining withdrawal liability to the Local 807 Pension Fund for a lump sum cash settlement payment of $3.0 million plus two remaining installment payments of $91,000 due on or before October 1, 2034 and on or before January 1, 2035. In the three and six months ended December 31, 2018, the Company paid the Local 807 Pension Fund $3.0 million and recorded $0.2 million in “Accrued pension liabilities” on the Company’s condensed consolidated balance sheet at December 31, 2018.

Future collective bargaining negotiations may result in the Company withdrawing from the remaining multiemployer pension plans in which it participates and, if successful, the Company may incur a withdrawal liability, the amount of which could be material to the Company’s results of operations and cash flows.

Multiemployer Plans Other Than Pension Plans
The Company participates in nine multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. The plans are subject to the provisions of the Employee Retirement Income Security Act of 1974, and provide that participating employers make monthly contributions to the plans in an amount as specified in the collective bargaining agreements. Also, the plans provide that participants make self-payments to the plans, the amounts of which are negotiated through the collective bargaining process. The Company’s participation in these plans is governed by collective bargaining agreements which expire on or before June 30, 2022.
401(k) Plan
The Company’s 401(k) Plan is available to all eligible employees. Participants in the 401(k) Plan may choose to contribute a percentage of their annual pay subject to the maximum contribution allowed by the Internal Revenue Service.


23


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


For the calendar years 2018 and 2017, the Company’s Board of Directors approved a Company matching contribution for eligible employees who worked more than 1,000 hours during the calendar year and who were employed at the end of the calendar year or, in the case of calendar year 2018, who were active participants in the plan at any time during the plan year and who were terminated in connection with certain reductions-in-force that occurred during 2018, of 50% of an employee’s annual contribution to the 401(k) Plan, up to 6% of the employee’s eligible income. For employees subject to a collective bargaining agreement, the match was only available if so provided in the labor agreement. The matching contributions (and any earnings thereon) vest at the rate of 20% for each of the participant’s first 5 years of vesting service, so that a participant is fully vested in his or her matching contribution account after 5 years of vesting service, subject to accelerated vesting under certain circumstances in connection with the Corporate Relocation Plan due to the closure of the Company’s Torrance Facility, a reduction-in-force at another Company facility designated by the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement Plans (the “Administrative Committee”), or in connection with certain reductions-in-force that occurred during 2017 and 2018. A participant is automatically vested in the Company’s matching contribution in the event of death, disability or attainment of age 65 while employed by the Company.

The Company recorded matching contributions of $0.4 million and $0.5 million in operating expenses in the three months ended December, 2018 and 2017. The Company recorded matching contributions of $0.9 million and $1.0 million in operating expenses in the six months ended December, 2018 and 2017.

During the three months ended December 31, 2018, the Company amended and restated the 401(k) Plan effective January 1, 2019 to, among other things, provide for: (i) an annual safe harbor non-elective contribution of shares of the Company’s common stock equal to 4% of each eligible participant’s annual plan compensation; (ii) an elective matching contribution for non-collectively bargained employees and members of union local 265 equal to 100% of the first 3% of such eligible participant’s tax-deferred contributions to the 401(k) Plan; and (iii) profit-sharing contributions at the Company’s discretion. Participants are immediately vested in their contributions, the safe harbor non-elective contributions, the employer’s elective matching contributions, and the employer’s discretionary contributions.

Postretirement Benefits
The Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees (“Retiree Medical Plan”). The plan provides medical, dental and vision coverage for retirees under age 65 and medical coverage only for retirees age 65 and above. Under this postretirement plan, the Company’s contributions toward premiums for retiree medical, dental and vision coverage for participants and dependents are scaled based on length of service, with greater Company contributions for retirees with greater length of service, subject to a maximum monthly Company contribution.
The Company also provides a postretirement death benefit (“Death Benefit”) to certain of its employees and retirees, subject, in the case of current employees, to continued employment with the Company until retirement and certain other conditions related to the manner of employment termination and manner of death. The Company records the actuarially determined liability for the present value of the postretirement death benefit. The Company has purchased life insurance policies to fund the postretirement death benefit wherein the Company owns the policy but the postretirement death benefit is paid to the employee’s or retiree’s beneficiary. The Company records an asset for the fair value of the life insurance policies which equates to the cash surrender value of the policies. 

24


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


Retiree Medical Plan and Death Benefit
The following table shows the components of net periodic postretirement benefit cost for the Retiree Medical Plan and Death Benefit for the three and six months ended December 31, 2018 and 2017. Net periodic postretirement benefit cost for the three and six months ended December 31, 2018 was based on employee census information and asset information as of June 30, 2018. 
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
2018
 
2017
 
2018
 
2017
(In thousands)
 
 
 
 
 
 
 
 
Components of Net Periodic Postretirement Benefit Cost (Credit):
 
 
 
 
 
 
 
 
Service cost
 
$
133

 
$
152

 
$
266

 
$
304

Interest cost
 
222

 
209

 
444

 
418

Amortization of net gain
 
(209
)
 
(210
)
 
(418
)
 
(420
)
Amortization of prior service credit
 
(439
)
 
(439
)
 
(878
)
 
(878
)
Net periodic postretirement benefit credit
 
$
(293
)
 
$
(288
)
 
$
(586
)
 
$
(576
)
On July 1, 2018, the Company adopted ASU 2017-07, which impacted the presentation of the components of net periodic postretirement benefit cost in the condensed consolidated statements of income. Net periodic postretirement benefit cost, other than the service cost component, is retrospectively included in “Interest expense” and “Other, net” in the condensed consolidated statements of income. See Note 2.
Weighted-Average Assumptions Used to Determine Net Periodic Postretirement Benefit Cost 
 
 
Fiscal
 
 
2019
 
2018
Retiree Medical Plan discount rate
 
4.25%
 
4.13%
Death Benefit discount rate
 
4.25%
 
4.12%

Note 13. Revolving Credit Facility
On November 6, 2018, the Company entered into a new $150.0 million senior secured revolving credit facility (the “New Revolving Facility”) with Bank of America, N.A, Citibank, N.A., JPMorgan Chase Bank, N.A., PNC Bank, National Association, Regions Bank, and SunTrust Bank, with a sublimit on letters of credit and swingline loans of $15.0 million each. The New Revolving Facility includes an accordion feature whereby the Company may increase the revolving commitments or enter into one or more tranches of incremental term loans, up to an additional $75.0 million in aggregate of increased commitments and incremental term loans, subject to certain conditions. The commitment fee is based on a leverage grid and ranges from 0.20% to 0.40%. Borrowings under the New Revolving Facility bear interest based on a leverage grid with a range of PRIME + 0.25% to PRIME + 0.875% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 1.875%. Under the New Revolving Facility, the Company is subject to a variety of affirmative and negative covenants of types customary in a senior secured lending facility, including financial covenants relating to leverage and interest expense coverage. The Company is allowed to pay dividends, provided, among other things, a total net leverage ratio is met, and no default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The New Revolving Facility matures on November 6, 2023, subject to the ability for the Company (subject to certain conditions) to agree with lenders who so consent to extend the maturity date of the commitments of such consenting lenders for a period of one year, such option being exercisable not more than two times during the term of the facility.
The New Revolving Facility replaced, by way of amendment and restatement, the Company’s senior secured revolving credit facility (the “Prior Revolving Facility”) with JPMorgan Chase Bank, N.A. and SunTrust Bank, with revolving commitments of $125.0 million as of September 30, 2018 and $135.0 million as of October 18, 2018 (the “Third Amendment Effective Date”), subject to an accordion feature. Under the Prior Revolving Facility, as amended, advances were based on the Company’s eligible accounts receivable, eligible inventory, eligible equipment, the value of certain real property and trademarks, and an amount based on the lesser of $10.0 million (subject to monthly reduction) and the sum of certain eligible accounts and eligible inventory, less required reserves. The commitment fee was a flat fee of 0.25% per

25


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


annum irrespective of average revolver usage. Outstanding obligations were collateralized by all of the Company’s and guarantors’ assets, excluding, amongst other things, certain real property not included in the borrowing base. Borrowings under the Prior Revolving Facility bore interest based on average historical excess availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%; provided, that, after the Third Amendment Effective Date, (i) until March 31, 2019 the applicable rate was PRIME + 0.25% or Adjusted LIBO Rate + 1.75%; and (ii) loans up to certain formula amounts were subject to an additional margin ranging from 0.375% to 0.50%. The Prior Revolving Facility included a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including a financial covenant relating to the maintenance of a fixed charge coverage ratio, and provided for customary events of default.
At December 31, 2018, the Company was eligible to borrow up to a total of $150.0 million under the New Revolving Facility and had outstanding borrowings of $130.0 million and utilized $2.0 million of the letters of credit sublimit. At December 31, 2018, the weighted average interest rate on the Company’s outstanding borrowings under the New Revolving Facility was 3.94% and the Company was in compliance with all of the covenants under the New Revolving Facility.
The Company classifies borrowings contractually due to be settled one year or less as short-term and more than one year as long-term. The Company classifies outstanding borrowings as short-term or long-term based on its ability and intent to pay or refinance the outstanding borrowings on a short-term or long-term basis. Outstanding borrowings under the Company’s revolving credit facility were classified on the Company’s consolidated balance sheets as “Long-term borrowings under revolving credit facility” at December 31, 2018 and “Short-Term borrowings under revolving credit facility” at June 30, 2018.

Note 14. Employee Stock Ownership Plan
The Company’s ESOP was established in 2000. The plan is a leveraged ESOP in which the Company is the lender. One of the two loans established to fund the ESOP matured in fiscal 2016 and the remaining loan matured in December 2018. The loan was repaid from the Company’s discretionary plan contributions over the original 15 year term with a variable rate of interest. The annual interest rate was 3.80% at June 30, 2018.
 
 
December 31, 2018
 
June 30, 2018
Loan amount (in thousands)
 
$

 
$
2,145

Shares are held by the plan trustee for allocation among participants as the loan is repaid. The unencumbered shares are allocated to participants using a compensation-based formula. Subject to vesting requirements, allocated shares are owned by participants and shares are held by the plan trustee until the participant retires.
Historically, the Company used the dividends, if any, on ESOP shares to pay down the loans, and allocated to the ESOP participants shares equivalent to the fair market value of the dividends they would have received. No dividends were paid in the three and six months ended December 31, 2018.
During the three and six months ended December 31, 2018, the Company charged $0.4 million and $0.9 million, respectively, to compensation expense related to the ESOP. During the three and six months ended December 31, 2017, the Company charged $0.6 million and $1.2 million, respectively, to compensation expense related to the ESOP.
The decrease in ESOP expense in the three and six months ended December 31, 2018 was primarily due to the reduction in the number of shares being allocated to participant accounts as a result of paying down the loan amount. The difference between cost and fair market value of committed to be released shares, which was zero and $0.1 million at December 31, 2018 and June 30, 2018, respectively, is recorded as additional paid-in capital.
 
 
December 31, 2018
 
June 30, 2018
Allocated shares
 
1,323,307

 
1,502,323

Committed to be released shares
 
72,114

 
73,826

Unallocated shares
 

 
72,114

Total ESOP shares
 
1,395,421

 
1,648,263

 
 
 
 
 
(In thousands)
 
 
 
 
Fair value of ESOP shares
 
$
32,555

 
$
50,354


26


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


During the three months ended December 31, 2018, the Company froze the ESOP such that (i) no employees of the Company may commence participation in the ESOP on or after December 31, 2018; (ii) no Company contributions will be made to the ESOP with respect to services performed or compensation received after December 31, 2018; and (iii) the ESOP accounts of all individuals who are actively employed by the Company and participating in the ESOP on December 31, 2018 will be fully vested as of such date. Additionally, the Administrative Committee, with the consent of the Board of Directors, designated certain employees who were terminated in connection with certain reductions-in-force in 2018 to be fully vested in their ESOP accounts as of their severance dates.

Note 15. Share-based Compensation
Farmer Bros. Co. 2017 Long-Term Incentive Plan
On June 20, 2017 (the “Effective Date”), the Company’s stockholders approved the Farmer Bros. Co. 2017 Long-Term Incentive Plan (the “2017 Plan”). The 2017 Plan succeeded the Company’s prior long-term incentive plans, the Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (the “Amended Equity Plan”) and the Farmer Bros. Co. 2007 Omnibus Plan (collectively, the “Prior Plans”). On the Effective Date, the Company ceased granting awards under the Prior Plans; however, awards outstanding under the Prior Plans will remain subject to the terms of the applicable Prior Plan.
The 2017 Plan provides for the grant of stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance shares and other stock- or cash-based awards to eligible participants. Non-employee directors of the Company and employees of the Company or any of its subsidiaries are eligible to receive awards under the 2017 Plan. The 2017 Plan authorizes the issuance of (i) 900,000 shares of common stock plus (ii) the number of shares of common stock subject to awards under the Company’s Prior Plans that are outstanding as of the Effective Date and that expire or are forfeited, cancelled or similarly lapse following the Effective Date. Subject to certain limitations, shares of common stock covered by awards granted under the 2017 Plan that are forfeited, expire or lapse, or are repurchased for or paid in cash, may be used again for new grants under the 2017 Plan. As of December 31, 2018, there were 960,288 shares available under the 2017 Plan including shares that were forfeited under the Prior Plans. Shares of common stock granted under the 2017 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares. In no event will more than 900,000 shares of common stock be issuable pursuant to the exercise of incentive stock options under the 2017 Plan.
The 2017 Plan contains a minimum vesting requirement, subject to limited exceptions, that awards made under the 2017 Plan may not vest earlier than the date that is one year following the grant date of the award. The 2017 Plan also contains provisions with respect to payment of exercise or purchase prices, vesting and expiration of awards, adjustments and treatment of awards upon certain corporate transactions, including stock splits, recapitalizations and mergers, transferability of awards and tax withholding requirements.
The 2017 Plan may be amended or terminated by the Board at any time, subject to certain limitations requiring stockholder consent or the consent of the applicable participant. In addition, the administrator of the 2017 Plan may not, without the approval of the Company’s stockholders, authorize certain re-pricings of any outstanding stock options or stock appreciation rights granted under the 2017 Plan. The 2017 Plan will expire on June 20, 2027.
Non-qualified stock options with time