NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Introduction and Basis of Presentation
Overview
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company,” or “Farmer Bros.”), is a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products. The Company serves a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurant, department and convenience store chains, hotels, casinos, healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand and consumer-branded coffee and tea products, and foodservice distributors. The Company’s product categories consist of roast and ground coffee, frozen liquid coffee; flavored and unflavored iced and hot teas; culinary products; spices; and other beverages including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee. The Company was founded in
1912
, incorporated in California in 1923, and reincorporated in Delaware in 2004. The Company operates in
one
business segment.
In fiscal 2015 the Company began the process of relocating its corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California to a new facility housing these operations in Northlake, Texas (the “New Facility”) (the “Corporate Relocation Plan”). In order to focus on the Company’s core product offerings, in the second quarter of fiscal 2016, the Company sold certain assets associated with its manufacture, processing and distribution of raw, processed and blended spices and certain other culinary products (collectively, the “Spice Assets”) to Harris Spice Company Inc. (“Harris”). In fiscal 2017, the Company completed the construction of and exercised the purchase option to acquire the New Facility, relocated its Torrance operations to the New Facility, and sold its facility in Torrance, California (the “Torrance Facility“). The Company commenced distribution activities at the New Facility during the second quarter of fiscal 2017 and initial production activities late in the third quarter of fiscal 2017. The Company completed the Corporate Relocation Plan and began roasting coffee in the New Facility in the fourth quarter of fiscal 2017.
In fiscal 2018, on October 2, 2017, 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, in consideration of cash and preferred stock. In fiscal 2017, the Company completed
two
acquisitions. On October 11, 2016, the Company acquired substantially all of the assets and certain specified liabilities of China Mist Brands, Inc. dba China Mist Tea Company (“China Mist”), a provider of flavored and unflavored iced and hot teas, and on February 7, 2017, the Company acquired substantially all of the assets and certain specified liabilities of West Coast Coffee Company, Inc. (“West Coast Coffee”), a coffee roaster and distributor with a focus on the convenience store, grocery and foodservice channels.
In the third quarter of fiscal 2017, the Company commenced a restructuring plan to reorganize its direct-store-delivery, or 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 Company expects to complete the DSD Restructuring Plan by the end of fiscal 2019.
In the third quarter of fiscal 2018, the Company commenced a project to expand its production lines (the “Expansion Project”) in the New Facility, including expanding capacity to support the transition of acquired business volumes. Construction, equipment procurement and installation associated with the Expansion Project are expected to be completed in fiscal 2019.
The Company operates production facilities in Northlake, Texas; Houston, Texas; Portland, Oregon; and Hillsboro, Oregon. Distribution takes place out of the New Facility, the Portland and Hillsboro facilities, as well as separate distribution centers in Northlake, Illinois; Moonachie, New Jersey; and Scottsdale, Arizona.
The Company’s products reach its customers primarily in the following ways: through the Company’s nationwide DSD network of
447
delivery routes and
111
branch warehouses as of June 30, 2018, or direct-shipped via common carriers or third-party distributors. The Company operates a large fleet of trucks and other vehicles to distribute and deliver its
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
products through its DSD network, and relies on third-party logistic (“3PL”) service providers for its long-haul distribution. DSD sales are primarily made “off-truck” by the Company to its customers at their places of business.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries. All inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company reviews its estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates and actual results may differ from those estimates.
Note 2. Summary of Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments with original maturity dates of
90 days
or less to be cash equivalents. Fair values of cash equivalents approximate cost due to the short period of time to maturity.
Investments
The Company’s investments, from time to time, consist of money market instruments, marketable debt, equity and hybrid securities. Investments are held for trading purposes and stated at fair value. The cost of investments sold is determined on the specific identification method. Dividend and interest income are accrued as earned. See
Note 9
.
Fair Value Measurements
The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
•
Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.
•
Level 2—Valuation is based upon inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly (i.e. interest rate and yield curves observable at commonly quoted intervals, default rates, etc.). Observable inputs include quoted prices for similar instruments in active and non-active markets. Level 2 includes those financial instruments that are valued with industry standard valuation models that incorporate inputs that are observable in the marketplace throughout the full term of the instrument, or can otherwise be derived from or supported by observable market data in the marketplace. Level 2 inputs may also include insignificant adjustments to market observable inputs.
•
Level 3—Valuation is based upon one or more unobservable inputs that are significant in establishing a fair value estimate. These unobservable inputs are used to the extent relevant observable inputs are not available and are developed based on the best information available. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
Securities with quotes that are based on actual trades or actionable bids and offers with a sufficient level of activity on or near the measurement date are classified as Level 1. Securities that are priced using quotes derived from implied values, indicative bids and offers, or a limited number of actual trades, or the same information for securities that are similar in many respects to those being valued, are classified as Level 2. If market information is not available for securities being valued, or materially-comparable securities, then those securities are classified as Level 3. In considering market information, management evaluates changes in liquidity, willingness of a broker to execute at the quoted price, the depth and consistency of prices from pricing services, and the existence of observable trades in the market. See
Note 10
.
Derivative Instruments
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The Company executes various derivative instruments to hedge its commodity price risk. These derivative instruments consist primarily of forward and option contracts. The Company reports the fair value of derivative instruments on its consolidated balance sheets in “Short-term derivative assets,” “Other assets,” “Short-term derivative liabilities,” or “Other long-term liabilities.” The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades and reports these amounts on a gross basis. Additionally, the Company reports cash held on deposit in margin accounts for coffee-related derivative instruments on a gross basis on its consolidated balance sheet in “Restricted cash.”
The accounting for the changes in fair value of the Company's derivative instruments can be summarized as follows:
|
|
|
|
Derivative Treatment
|
|
Accounting Method
|
Normal purchases and normal sales exception
|
|
Accrual accounting
|
Designated in a qualifying hedging relationship
|
|
Hedge accounting
|
All other derivative instruments
|
|
Mark-to-market accounting
|
The Company enters into green coffee purchase commitments at a fixed price or at a price to be fixed (“PTF”). PTF contracts are purchase commitments whereby the quality, quantity, delivery period, price differential to the coffee “C” market price and other negotiated terms are agreed upon, but the date, and therefore the price at which the base “C” market price will be fixed has not yet been established. The coffee “C” market price is fixed at some point after the purchase contract date and before the futures market closes for the delivery month and may be fixed either at the direction of the Company to the vendor, or by the application of a derivative that was separately purchased as a hedge. For both fixed-price and PTF contracts, the Company expects to take delivery of and to utilize the coffee in a reasonable period of time and in the conduct of normal business. Accordingly, these purchase commitments qualify as normal purchases and are not recorded at fair value on the Company's consolidated balance sheets.
The Company follows the guidelines of Accounting Standards Codification (“ASC”) 815, “Derivatives and Hedging” (“ASC 815”), to account for certain coffee-related derivative instruments as accounting hedges, in order to minimize the volatility created in the Company's quarterly results from utilizing these derivative instruments and to improve comparability between reporting periods. For a derivative to qualify for designation in a hedging relationship, it must meet specific criteria and the Company must maintain appropriate documentation. The Company establishes hedging relationships pursuant to its risk management policies. The hedging relationships are evaluated at inception and on an ongoing basis to determine whether the hedging relationship is, and is expected to remain, highly effective in achieving offsetting changes in fair value or cash flows attributable to the underlying risk being hedged. The Company also regularly assesses whether the hedged forecasted transaction is probable of occurring. If a derivative ceases to be or is no longer expected to be highly effective, or if the Company believes the likelihood of occurrence of the hedged forecasted transaction is no longer probable, hedge accounting is discontinued for that derivative, and future changes in the fair value of that derivative are recognized in “Other, net
.”
For coffee-related derivative instruments designated as cash flow hedges, the change in fair value of the derivative is reported as accumulated other comprehensive income (loss) (“AOCI”) and subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. Gains or losses deferred in AOCI associated with terminated derivative instruments, derivative instruments that cease to be highly effective hedges, derivative instruments for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, any gain or loss deferred in AOCI is recognized in “Other, net” at that time. For derivative instruments that are not designated in a hedging relationship, and for which the normal purchases and normal sales exception has not been elected, the changes in fair value are reported in “Other, net.” See
Note 8
.
Concentration of Credit Risk
At
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 June 30, 2018 and 2017, none of the cash in the Company’s
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
coffee-related derivative margin accounts was restricted due to the net loss position not exceeding the credit limit in such accounts at June 30, 2018, and the net gain position in such accounts at June 30, 2017. Changes in commodity prices and the number of coffee-related derivative instruments held could have a significant impact on cash deposit requirements under the Company's broker and counterparty agreements.
Concentration of credit risk with respect to trade receivables for the Company is limited due to the large number of customers comprising the Company’s customer base and their dispersion across many different geographic areas. The trade receivables are generally short-term and all probable bad debt losses have been appropriately considered in establishing the allowance for doubtful accounts. In fiscal 2018, the Company decreased the allowance for doubtful accounts by
$226,000
. In fiscal 2017 and 2016, the Company increased the allowance for doubtful accounts by
$7,000
and
$71,000
, respectively.
Inventories
Inventories are valued at the lower of cost or net realizable value. Effective June 30, 2018, the Company changed its method of accounting for coffee, tea and culinary products from the last in, first out (“LIFO”) basis to the first in, first out ("FIFO") basis. See
Note 3
. The Company continues to account for coffee brewing equipment parts on a FIFO basis. The Company regularly evaluates these inventories to determine the provision for obsolete and slow-moving inventory. Inventory reserves are based on inventory obsolescence trends, historical experience and application of specific identification. See
Note 12
.
Property, Plant and Equipment
Property, plant and equipment is carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method. The following useful lives are used:
|
|
|
Buildings and facilities
|
10 to 30 years
|
Machinery and equipment
|
3 to 10 years
|
Equipment under capital leases
|
Shorter of term of lease or estimated useful life
|
Office furniture and equipment
|
5 to 7 years
|
Capitalized software
|
3 to 5 years
|
Leasehold improvements are depreciated on a straight-line basis over the lesser of the estimated useful life of the asset or the remaining lease term. When assets are sold or retired, the asset and related accumulated depreciation are removed from the respective account balances and any gain or loss on disposal is included in operations. Maintenance and repairs are charged to expense, and enhancements are capitalized. See
Note 13
.
Coffee Brewing Equipment and Service
The Company classifies certain expenses related to coffee brewing equipment provided to customers as cost of goods sold. These costs include the cost of the equipment as well as the cost of servicing that equipment (including service employees’ salaries, cost of transportation and the cost of supplies and parts) and are considered directly attributable to the generation of revenues from its customers. Accordingly, such costs included in cost of goods sold in the accompanying consolidated financial statements for the years ended June 30, 2018, 2017 and 2016 were
$30.2 million
,
$26.3 million
and
$27.0 million
, respectively.
The Company capitalizes coffee brewing equipment and depreciates it over five years and reports the depreciation expense in cost of goods sold. See
Note 13
.
Leases
Leases are categorized as either operating or capital leases at inception. Operating lease costs are recognized on a straight-line basis over the term of the lease. An asset and a corresponding liability for the capital lease obligation are established for the cost of a capital lease. Capital lease obligations are amortized over the life of the lease.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Income Taxes
Deferred income taxes are determined based on the temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates in effect for the year in which differences are expected to reverse. Estimating the Company’s tax liabilities involves judgments related to uncertainties in the application of complex tax regulations. The Company makes certain estimates and judgments to determine tax expense for financial statement purposes as it evaluates the effect of tax credits, tax benefits and deductions, some of which result from differences in the timing of recognition of revenue or expense for tax and financial statement purposes. Changes to these estimates may result in significant changes to the Company’s tax provision in future periods. Each fiscal quarter the Company re-evaluates its tax provision and reconsiders its estimates and assumptions related to specific tax assets and liabilities, making adjustments as circumstances change.
Deferred Tax Asset Valuation Allowance
The Company evaluates its deferred tax assets quarterly to determine if a valuation allowance is required and considers whether a valuation allowance should be recorded against deferred tax assets based on the likelihood that the benefits of the deferred tax assets will or will not ultimately be realized in future periods. In making this assessment, significant weight is given to evidence that can be objectively verified, such as recent operating results, and less consideration is given to less objective indicators, such as future income projections. After consideration of positive and negative evidence, if the Company determines that it is more likely than not that it will generate future income sufficient to realize its deferred tax assets, the Company will record a reduction in the valuation allowance. See
Note 21
.
Revenue Recognition
The Company recognizes sales revenue when all of the following have occurred: (1) delivery; (2) persuasive evidence of an agreement exists; (3) pricing is fixed or determinable; and (4) collection is reasonably assured. When product sales are made “off-truck” to the Company’s customers at their places of business or products are shipped by third-party delivery “FOB Destination,“ title passes and revenue is recognized upon delivery. When customers pick up products at the Company's distribution centers, title passes and revenue is recognized upon product pick up.
Net (Loss) Income Per Common Share
Net (loss) income per share (“EPS”) represents net (loss) income available to common stockholders divided by the weighted-average number of common shares outstanding for the period, excluding unallocated shares held by the Company's Employee Stock Ownership Plan (“ESOP”). See
Note 17
. Dividends on the Company's outstanding Series A Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share ("Series A Preferred Stock"), that the Company has paid or intends to pay are deducted from net (loss) income in computing net (loss) income available to common stockholders.
Under the two-class method, net (loss) income available to nonvested restricted stockholders and holders of Series A Preferred Stock is excluded from net (loss) income available to common stockholders for purposes of calculating basic and diluted EPS.
Diluted EPS represents net income available to holders of common stock divided by the weighted-average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period. Common equivalent shares include potentially dilutive shares from share-based compensation including stock options, unvested restricted stock, performance-based restricted stock units, and shares of Series A Preferred Stock, as converted, because they are deemed participating securities. In the absence of contrary information, the Company assumes 100% of the target shares are issuable under performance-based restricted stock units.
The dilutive effect of Series A Preferred Stock is reflected in diluted EPS by application of the if-converted method. In applying the if-converted method, conversion will not be assumed for purposes of computing diluted EPS if the effect would be anti-dilutive. The Series A Preferred Stock is antidilutive whenever the amount of the dividend declared or accumulated in the current period per common share obtainable upon conversion exceeds basic EPS. See
Note 22
.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Employee Stock Ownership Plan
Compensation cost for the ESOP is based on the fair market value of shares released or deemed to be released to employees in the period in which they are committed. As a leveraged ESOP with the Company as lender, a contra equity account is established to offset the Company’s note receivable. The contra account will change as compensation expense is recognized. See
Note 17
. The cost of shares purchased by the ESOP which have not been committed to be released or allocated to participants are shown as a contra-equity account “Unearned ESOP Shares” and are excluded from EPS calculations.
Share-based Compensation
The Company measures all share-based compensation cost at the grant date, based on the fair values of the awards that are ultimately expected to vest, and recognizes that cost as an expense on a straight line-basis in its consolidated statements of operations over the requisite service period. Fair value of restricted stock and performance-based restricted stock units is the closing price of the Company's common stock on the date of grant. The Company estimates the fair value of option awards using the Black-Scholes option valuation model, which requires management to make certain assumptions for estimating the fair value of stock options at the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management’s opinion, the existing models may not necessarily provide a reliable single measure of the fair value of the Company’s stock options. Although the fair value of stock options is determined using an option valuation model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
In addition, the Company estimates the expected impact of forfeited awards and recognizes share-based compensation cost only for those awards ultimately expected to vest. If actual forfeiture rates differ materially from the Company’s estimates, share-based compensation expense could differ significantly from the amounts the Company has recorded in the current period. The Company periodically reviews actual forfeiture experience and will revise its estimates, as necessary. The Company will recognize as compensation cost the cumulative effect of the change in estimated forfeiture rates on current and prior periods in earnings of the period of revision. As a result, if the Company revises its assumptions and estimates, the Company’s share-based compensation expense could change materially in the future.
The Company's outstanding share-based awards include performance-based non-qualified stock options ("PNQs") and performance-based restricted stock units ("PBRSUs") that have performance-based vesting conditions in addition to time-based vesting. Awards with performance-based vesting conditions require the achievement of certain financial and other performance criteria as a condition to the vesting. The Company recognizes the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the service period based upon the Company’s determination of whether it is probable that the performance targets will be achieved. At each reporting period, the Company reassesses the probability of achieving the performance criteria and the performance period required to meet those targets. Determining whether the performance criteria will be achieved involves judgment, and the estimate of share-based compensation expense may be revised periodically based on changes in the probability of achieving the performance criteria. Revisions are reflected in the period in which the estimate is changed. If performance goals are not met, no share-based compensation expense is recognized for the cancelled PNQs or PBRSUs, and, to the extent share-based compensation expense was previously recognized for those cancelled PNQs or PBRSUs, such share-based compensation expense is reversed. If performance goals are exceeded and the payout is more than 100% of the target shares in the case of PBRSUs, additional compensation expense is recorded in the period when that determination is certified by the Compensation Committee of the Board of Directors. See
Note 18
.
Impairment of Goodwill and Indefinite-lived Intangible Assets
The Company accounts for its goodwill and indefinite-lived intangible assets in accordance with Accounting Standards Codification ("ASC") 350, “Intangibles-Goodwill and Other” (“ASC 350”). Goodwill and other indefinite-lived intangible assets are not amortized but instead are reviewed for impairment annually, or more frequently if an event occurs or circumstances change which indicate that an asset might be impaired. Pursuant to ASC 350, the Company performs a qualitative assessment of goodwill and indefinite-lived intangible assets on its consolidated balance sheets, to determine if there is a more likely than not indication that its goodwill and indefinite-lived intangible assets are impaired as of January
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
31. If the indicators of impairment are present, the Company performs a quantitative assessment to determine the impairment of these assets as of the measurement date.
Testing for impairment of goodwill is a two-step process. The first step requires the Company to compare the fair value of its reporting units to the carrying value of the reporting units, including goodwill. If the fair value of a reporting unit is less than its carrying value, goodwill of the reporting unit is potentially impaired and the Company then completes step two to measure the impairment loss, if any. The second step requires the calculation of the implied fair value of goodwill, which is the residual fair value remaining after deducting the fair value of all tangible and intangible net assets of the reporting unit from the fair value of the reporting unit. If the implied fair value of goodwill is less than the carrying amount of goodwill, an impairment loss is recognized equal to the difference.
Indefinite-lived intangible assets consist of certain acquired trademarks, trade names and a brand name. Indefinite-lived intangible assets are tested for impairment by comparing their fair values to their carrying values. An impairment charge is recorded if the estimated fair value of such assets has decreased below their carrying values. See
Note 14
.
Other Intangible Assets
Other intangible assets consist of finite-lived intangible assets including acquired recipes, non-compete agreements, customer relationships, a trade name/brand name and certain trademarks. These assets are amortized over their estimated useful lives and are tested for impairment by grouping them with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. The Company reviews the recoverability of its finite-lived intangible assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. See
Note 14
.
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
$11.9 million
,
$10.7 million
and
$11.1 million
, respectively, in the fiscal years ended June 30, 2018, 2017 and 2016. The Company moved to 3PL for its long-haul distribution in the third quarter of fiscal 2016. As a result, payroll, benefits, vehicle costs and other costs associated with the Company’s internal operation of its long-haul distribution included elsewhere in selling expenses in the fiscal year ended June 30, 2016, are included in shipping and handling costs beginning in the third quarter of fiscal 2016.
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”). See
Note 3
.
Collective Bargaining Agreements
Certain Company employees are subject to collective bargaining agreements which expire on or before June 30,
2022
. At June 30, 2018, approximately
27%
of the Company's workforce was covered by such agreements.
Self-Insurance
The Company uses a combination of insurance and self-insurance mechanisms to provide for the potential liability of certain risks including workers’ compensation, health care benefits, general liability, product liability, property insurance and director and officers’ liability insurance. Liabilities associated with risks retained by the Company are not discounted and are estimated by considering historical claims experience, demographics, exposure and severity factors and other actuarial assumptions.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The Company's self-insurance for workers’ compensation liability includes estimated outstanding losses of unpaid claims. and allocated loss adjustment expenses (“ALAE”), case reserves, the development of known claims and incurred but not reported claims. ALAE are the direct expenses for settling specific claims. The amounts reflect per occurrence and annual aggregate limits maintained by the Company. The estimated liability analysis does not include estimating a provision for unallocated loss adjustment expenses.
The estimated gross undiscounted workers’ compensation liability relating to such claims was
$7.1 million
and
$9.4 million
, respectively, and the estimated recovery from reinsurance was
$0.9 million
and
$1.5 million
, respectively, as of June 30, 2018 and 2017. The short-term and long-term accrued liabilities for workers’ compensation claims are presented on the Company's consolidated balance sheets in “Other current liabilities” and in “Accrued workers' compensation liabilities,” respectively. The estimated insurance receivable is included in “Other assets” on the Company's consolidated balance sheets.
At June 30, 2018 the Company had posted
$2.3 million
in cash and a
$2.0 million
letter of credit, and at June 30, 2017 the Company had posted
$3.4 million
in cash, as a security deposit for self-insuring workers’ compensation, general liability and auto insurance coverages.
The estimated liability related to the Company's self-insured group medical insurance at June 30, 2018 and 2017 was
$1.6 million
and
$2.5 million
, respectively, recorded on an incurred but not reported basis, within deductible limits, based on actual claims and the average lag time between the date insurance claims are filed and the date those claims are paid.
The Company is self-insured for general liability, product liability and commercial auto liability and accrues the cost of the insurance based on estimates of the aggregate liability claims incurred using certain actuarial assumptions and historical claims experience. The Company's liability reserve for such claims was
$1.7 million
and
$0.9 million
at June 30, 2018 and 2017, respectively. The estimated liability related to the Company's self-insured group medical insurance, general liability, product liability and commercial auto liability is included on the Company's consolidated balance sheets in “Other current liabilities.”
Pension Plans
The Company’s defined benefit pension plans are not admitting new participants, therefore, changes to pension liabilities are primarily due to market fluctuations of investments for existing participants and changes in interest rates. The Company’s defined benefit pension plans are accounted for using the guidance of ASC 710, “Compensation—General“ and ASC 715, “Compensation-Retirement Benefits“ and are measured as of the end of the fiscal year.
The Company recognizes the overfunded or underfunded status of a defined benefit pension as an asset or liability on its consolidated balance sheets. Changes in the funded status are recognized through AOCI, in the year in which the changes occur. See
Note 15
.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Business Combinations
The Company accounts for business combinations under the acquisition method of accounting. The purchase price of each business acquired is allocated to the tangible and intangible assets acquired and the liabilities assumed based on information regarding their respective fair values on the date of acquisition. Any excess of the purchase price over the fair value of the separately identifiable assets acquired and the liabilities assumed is allocated to goodwill. Management determines the fair values used in purchase price allocations for intangible assets based on historical data, estimated discounted future cash flows, and expected royalty rates for trademarks and trade names, as well as certain other information. The valuation of assets acquired and liabilities assumed requires a number of judgments and is subject to revision as additional information about the fair value of assets and liabilities becomes available. Additional information, which existed as of the acquisition date but unknown to the Company at that time, may become known during the remainder of the measurement period, a period not to exceed twelve months from the acquisition date. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill and intangible assets. If such an adjustment is required, the Company will recognize a measurement-period adjustment during the period in which it determines the amount of the adjustment, including the effect on earnings of any amounts it would have recorded in previous periods if the accounting had been completed at the acquisition date. Transaction costs, including legal, accounting and integration expenses, are expensed as incurred and are included in operating expenses in the Company's consolidated statements of operations. Contingent consideration, such as earnout, is deferred as a short-term or long-term liability based on an estimate of the timing of the future payment. These contingent consideration liabilities are recorded at fair value on the acquisition date and are re-measured quarterly based on the then assessed fair value and adjusted if necessary. The results of operations of businesses acquired are included in the Company's consolidated financial statements from their dates of acquisition. See
Note 4
.
Restructuring Plans
The Company accounts for exit or disposal of activities in accordance with ASC 420, “Exit or Disposal Cost Obligations.“ The Company defines a business restructuring as an exit or disposal activity that includes but is not limited to a program which is planned and controlled by management and materially changes either the scope of a business or the manner in which that business is conducted. Business restructuring charges may include (i) one-time termination benefits related to employee separations, (ii) contract termination costs and (iii) other related costs associated with exit or disposal activities.
A liability is recognized and measured at its fair value for one-time termination benefits once the plan of termination is communicated to affected employees and it meets all of the following criteria: (i) management commits to a plan of termination, (ii) the plan identifies the number of employees to be terminated and their job classifications or functions, locations and the expected completion date, (iii) the plan establishes the terms of the benefit arrangement and (iv) it is unlikely that significant changes to the plan will be made or the plan will be withdrawn. Contract termination costs include costs to terminate a contract or costs that will continue to be incurred under the contract without benefit to the Company. A liability is recognized and measured at its fair value when the Company either terminates the contract or ceases using the rights conveyed by the contract.
Recently Adopted Accounting Standards
In August 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-12. ASU 2017-12 amends the hedge accounting model in ASC 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. ASU 2017-12 expands an entity’s ability to hedge non-financial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. The guidance in ASU 2017-12 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted in any interim period or fiscal year before the effective date. For cash flow and net investment hedges existing at the date of adoption, entities will apply the new guidance using a modified retrospective approach (i.e., with a cumulative effect adjustment recorded to the opening balance of retained earnings as of the initial application date). The guidance provides transition relief to make it easier for entities to apply certain amendments to existing hedges (including fair value hedges)
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
where the hedge documentation needs to be modified. The Company early adopted ASU 2017-12 as of September 30, 2017 for its coffee-related derivative instruments designated as cash flow hedges. Adoption of ASU 2017-12 resulted in a cumulative adjustment of
$0.3 million
to the opening balance of retained earnings as of October 1, 2017. Adoption of ASU 2017-12 did not have any other material effect on the results of operations, financial position or cash flows of the Company.
In March 2016, the FASB issued ASU 2016-09. ASU 2016-09 was issued as part of the FASB’s Simplification Initiative. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU 2016-09 requires that the tax impact related to the difference between share-based compensation for book and tax purposes be recognized as income tax benefit or expense in the reporting period in which such awards vest. ASU 2016-09 also required a modified retrospective adoption for previously unrecognized excess tax benefits. The guidance in ASU 2016-09 is effective for public business entities for annual periods beginning after December 15, 2016, including interim periods within those annual reporting periods. The Company adopted ASU 2016-09 beginning July 1, 2017 on a modified retrospective basis, recognizing all excess tax benefits previously unrecognized, as a cumulative-effect adjustment increasing deferred tax assets by
$1.6 million
and increasing retained earnings by the same amount as of July 1, 2017. Adoption of ASU 2016-09 did not have any other material effect on the results of operations, financial position or cash flows of the Company.
In July 2015, the FASB issued ASU 2015-11. ASU 2015-11 simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Under current guidance, net realizable value is one of several calculations an entity needs to make to measure inventory at the lower of cost or market. ASU 2015-11 is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, and the guidance must be applied prospectively after the date of adoption. The Company adopted ASU 2015-11 beginning July 1, 2017. Adoption of ASU 2015-11 did not have a material effect on the results of operations, financial position or cash flows of the Company.
New Accounting Pronouncements
In March 2018, the FASB issued ASU No. 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118” (“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 (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. If the Company is not able to make a reasonable estimate for the impact of the Tax Act, it should not be recorded until a reasonable estimate can be made during the measurement period. The Company has recorded the provisional adjustments as of June 30, 2018 and expects to finalize the provisional amounts within one year from the enactment date. See
Note 21
.
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 March 2017, the FASB issued ASU No. 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”). ASU 2017-07 amends the requirements in GAAP related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. ASU 2017-07 changes the income statement presentation of defined benefit plan expense by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, curtailments and settlements, etc.). The operating expense component is reported with similar compensation costs while the non-operating expense components are reported in other income and expense. In addition, only the service cost component
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
is eligible for capitalization as part of an asset such as inventory or property, plant and equipment. The guidance in ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, and is effective for the Company beginning July 1, 2018. Because the expected operating expense component and non-operating expense components of net periodic benefit cost are not material to the consolidated financial statements of the Company, adoption of ASU 2017-07 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment“ (“ASU 2017-04“). The amendments in ASU 2017-04 address concerns regarding the cost and complexity of the two-step goodwill impairment test, and remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit's carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. The guidance in ASU 2017-04 is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and is effective for the Company beginning July 1, 2020. Adoption of ASU 2017-04 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business“ (“ASU 2017-01“). The amendments in ASU 2017-01 clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses and provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace the missing elements. The guidance in ASU 2017-01 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted in certain circumstances. ASU 2017-01 is effective for the Company beginning July 1, 2018. Adoption of ASU 2017-01 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. The guidance in ASU 2016-18 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted in certain circumstances. ASU 2016-18 is effective for the Company beginning July 1, 2018. Adoption of ASU 2016-18 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230):Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU 2016-15”). ASU 2016-15 addresses certain issues where diversity in practice was identified in classifying certain cash receipts and cash payments based on the guidance in ASC 230. ASC 230 is principles based and often requires judgment to determine the appropriate classification of cash flows as operating, investing or financing activities. The application of judgment has resulted in diversity in how certain cash receipts and cash payments are classified. Certain cash receipts and cash payments may have aspects of more than one class of cash flows. ASU 2016-15 clarifies that an entity will first apply any relevant guidance in ASC 230 and in other applicable topics. If there is no guidance that addresses those cash receipts and cash payments, an entity will determine each separately identifiable source or use and classify the receipt or payment based on the nature of the cash flow. If a receipt or payment has aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. The guidance in ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted in certain circumstances. ASU 2016-15 is effective for the Company beginning July 1, 2018. Adoption of ASU 2016-15 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)“ (“ASU 2016-02“), which introduces a new lessee model that brings substantially all leases onto the balance sheet. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments and a related right-of-use asset. For public business entities, ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods and is required to be adopted using the modified retrospective method. Early application is permitted. ASU 2016-02 is effective for the Company beginning July 1, 2019. The Company is evaluating the impact this guidance will have on its consolidated financial statements and expects the adoption will have a significant impact on the Company's financial position resulting from the increase in assets and liabilities.
In May 2014, the FASB issued accounting guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers under ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09“). ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. On August 12, 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,“ which defers the effective date of ASU 2014-09 by one year allowing early adoption as of the original effective date of January 1, 2017. The deferral results in the new accounting standard being effective for public business entities for annual reporting periods beginning after December 31, 2017, including interim periods within those fiscal years. ASU 2014-09 is effective for the Company beginning July 1, 2018. The Company has evaluated the provisions of ASU 2014-09 and assessed its impact on the Company’s financial statements, information systems, business processes, and financial statement disclosures. The Company has analyzed its revenue streams, performed detailed contract reviews for each stream, and evaluated the impact ASU 2014-09 will have on revenue recognition. The Company primarily recognizes revenue at point of sale or delivery and has determined that this will not change under the new standard. There are certain arrangements related to the contracts from recent acquisitions in which revenue recognition will be impacted, however, the adoption of ASU 2014-09 will not have a material effect on the results of operations, financial position or cash flows of the Company. In addition, the Company will include expanded disclosures related to revenue in order to comply with ASU 2014-09 and will adopt ASU 2014-09 using the modified retrospective method.
Note 3. Changes in Accounting Principles and Corrections to Previously Issued Financial Statements
Effective June 30, 2018, the Company changed its method of accounting for its coffee, tea and culinary products from the LIFO basis to the FIFO basis. Total inventories accounted for utilizing the LIFO cost flow assumption represented
91%
of the Company’s total inventories as of June 30, 2018 prior to this change in method. The Company believes that this change is preferable as it better matches revenues with associated expenses, aligns the accounting with the physical flow of inventory, and improves comparability with the Company’s peers.
Additionally, effective June 30, 2018, the Company implemented a change in accounting principle for freight costs incurred to transfer goods from a distribution center to a branch warehouse and warehousing overhead costs incurred to store and ready goods prior to their sale, from expensing such costs as incurred within selling expenses to capitalizing such costs as inventory and expensing through cost of goods sold. The Company has determined that it is preferable to capitalize such costs into inventory and expense through cost of goods sold because it better represents the costs incurred in bringing the inventory to its existing condition and location for sale to customers and it is consistent with the Company’s accounting treatment of similar costs.
In connection with these changes in accounting principles, subsequent to the issuance of the Company's consolidated financial statements for the fiscal year ended June 30, 2017, the Company determined that freight associated with certain non-coffee product lines ("allied") was incorrectly expensed as incurred in selling expenses, and the overhead variances and 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 consolidated financial statements for the fiscal years ended June 30, 2017 and 2016 and the corresponding footnote disclosure of unaudited quarterly financial data for each of the quarters in the fiscal year ended June 30, 2017 and for the first three quarters in the fiscal year ended June 30, 2018, to capitalize the appropriate portion of these costs in ending inventory of each period and to reclassify remaining allied freight to cost of goods sold. Management has evaluated the materiality of these misstatements from quantitative and qualitative perspectives, including the impact on gross profit
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
and income from operations, and has concluded that the misstatements are immaterial to the Company’s consolidated financial statements.
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, 2016 is
$17.7 million
.
The following table presents the impact of these changes on the Company’s consolidated balance sheet at June 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
(In thousands)
|
|
As Previously Reported
|
|
LIFO to FIFO Adjustment
|
|
Preferable Freight and Warehousing Adjustments
|
|
Corrections of Freight, Overhead Variances and PPVs
|
|
Retrospectively Adjusted
|
Inventories
|
|
$
|
56,251
|
|
|
$
|
19,675
|
|
|
$
|
3,821
|
|
|
$
|
43
|
|
|
$
|
79,790
|
|
Total current assets
|
|
$
|
117,164
|
|
|
$
|
19,675
|
|
|
$
|
3,821
|
|
|
$
|
43
|
|
|
$
|
140,703
|
|
Deferred income taxes
|
|
$
|
63,055
|
|
|
$
|
(7,625
|
)
|
|
$
|
(1,480
|
)
|
|
$
|
(17
|
)
|
|
$
|
53,933
|
|
Total assets
|
|
$
|
392,736
|
|
|
$
|
12,050
|
|
|
$
|
2,341
|
|
|
$
|
26
|
|
|
$
|
407,153
|
|
Retained earnings
|
|
$
|
221,182
|
|
|
$
|
13,444
|
|
|
$
|
2,341
|
|
|
$
|
26
|
|
|
$
|
236,993
|
|
Accumulated other comprehensive loss
|
|
$
|
(60,099
|
)
|
|
$
|
(1,394
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(61,493
|
)
|
Total stockholders’ equity
|
|
$
|
215,135
|
|
|
$
|
12,050
|
|
|
$
|
2,341
|
|
|
$
|
26
|
|
|
$
|
229,552
|
|
Total liabilities and stockholders’ equity
|
|
$
|
392,736
|
|
|
$
|
12,050
|
|
|
$
|
2,341
|
|
|
$
|
26
|
|
|
$
|
407,153
|
|
The following tables present the impact of these changes on the Company's consolidated statements of operations for the fiscal years ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 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
|
|
Retrospectively Adjusted
|
Cost of goods sold
|
|
$
|
327,765
|
|
|
$
|
1,739
|
|
|
$
|
19,835
|
|
|
$
|
5,283
|
|
|
$
|
354,622
|
|
Gross profit
|
|
$
|
213,735
|
|
|
$
|
(1,739
|
)
|
|
$
|
(19,835
|
)
|
|
$
|
(5,283
|
)
|
|
$
|
186,878
|
|
Selling expenses
|
|
$
|
157,198
|
|
|
$
|
—
|
|
|
$
|
(19,241
|
)
|
|
$
|
(4,628
|
)
|
|
$
|
133,329
|
|
Operating expenses
|
|
$
|
171,569
|
|
|
$
|
—
|
|
|
$
|
(19,241
|
)
|
|
$
|
(4,628
|
)
|
|
$
|
147,700
|
|
Income from operations
|
|
$
|
42,166
|
|
|
$
|
(1,739
|
)
|
|
$
|
(594
|
)
|
|
$
|
(655
|
)
|
|
$
|
39,178
|
|
Income before taxes
|
|
$
|
40,354
|
|
|
$
|
(1,739
|
)
|
|
$
|
(594
|
)
|
|
$
|
(655
|
)
|
|
$
|
37,366
|
|
Income tax expense
|
|
$
|
15,954
|
|
|
$
|
(663
|
)
|
|
$
|
(226
|
)
|
|
$
|
(250
|
)
|
|
$
|
14,815
|
|
Net income
|
|
$
|
24,400
|
|
|
$
|
(1,076
|
)
|
|
$
|
(368
|
)
|
|
$
|
(405
|
)
|
|
$
|
22,551
|
|
Net income available to common stockholders per common share—basic
|
|
$
|
1.46
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
1.35
|
|
Net income available to common stockholders per common share—diluted
|
|
$
|
1.45
|
|
|
$
|
(0.07
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
1.34
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2016
|
(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
|
|
Retrospectively Adjusted
|
Cost of goods sold
|
|
$
|
335,907
|
|
|
$
|
8,593
|
|
|
$
|
21,104
|
|
|
$
|
7,610
|
|
|
$
|
373,214
|
|
Gross profit
|
|
$
|
208,475
|
|
|
$
|
(8,593
|
)
|
|
$
|
(21,104
|
)
|
|
$
|
(7,610
|
)
|
|
$
|
171,168
|
|
Selling expenses
|
|
$
|
150,198
|
|
|
$
|
—
|
|
|
$
|
(20,502
|
)
|
|
$
|
(6,436
|
)
|
|
$
|
123,260
|
|
Operating expenses
|
|
$
|
200,296
|
|
|
$
|
—
|
|
|
$
|
(20,502
|
)
|
|
$
|
(6,436
|
)
|
|
$
|
173,358
|
|
Income (loss) from operations
|
|
$
|
8,179
|
|
|
$
|
(8,593
|
)
|
|
$
|
(602
|
)
|
|
$
|
(1,174
|
)
|
|
$
|
(2,190
|
)
|
Income (loss) before taxes
|
|
$
|
9,921
|
|
|
$
|
(8,593
|
)
|
|
$
|
(602
|
)
|
|
$
|
(1,174
|
)
|
|
$
|
(448
|
)
|
Income tax benefit
|
|
$
|
(79,997
|
)
|
|
$
|
6,430
|
|
|
$
|
450
|
|
|
$
|
878
|
|
|
$
|
(72,239
|
)
|
Net income
|
|
$
|
89,918
|
|
|
$
|
(15,023
|
)
|
|
$
|
(1,052
|
)
|
|
$
|
(2,052
|
)
|
|
$
|
71,791
|
|
Net income available to common stockholders per common share—basic
|
|
$
|
5.45
|
|
|
$
|
(0.91
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
4.35
|
|
Net income available to common stockholders per common share—diluted
|
|
$
|
5.41
|
|
|
$
|
(0.90
|
)
|
|
$
|
(0.07
|
)
|
|
$
|
(0.12
|
)
|
|
$
|
4.32
|
|
The following tables present the impact of these changes on the Company's consolidated statements of cash flows as of June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 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 income
|
|
$
|
24,400
|
|
|
$
|
(1,076
|
)
|
|
$
|
(368
|
)
|
|
$
|
(405
|
)
|
|
$
|
22,551
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
Deferred income taxes
|
|
$
|
15,482
|
|
|
$
|
(663
|
)
|
|
$
|
(226
|
)
|
|
$
|
(250
|
)
|
|
$
|
14,343
|
|
Net losses (gains) on derivative instruments and investments
|
|
$
|
(205
|
)
|
|
$
|
2,566
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,361
|
|
Change in operating assets and liabilities:
|
Inventories
|
|
$
|
(8,504
|
)
|
|
$
|
(786
|
)
|
|
$
|
594
|
|
|
$
|
655
|
|
|
$
|
(8,041
|
)
|
Derivative assets (liabilities), net
|
|
$
|
2,305
|
|
|
$
|
(41
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,264
|
|
Net cash provided by operating activities
|
|
$
|
42,112
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42,112
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
(In thousands)
|
|
As Previously Reported
|
|
LIFO to FIFO Adjustment
|
|
Preferable Freight and Warehousing Adjustments
|
|
Corrections of Freight, Overhead Variances and PPVs
|
|
Retrospectively Adjusted
|
Net income
|
|
$
|
89,918
|
|
|
$
|
(15,023
|
)
|
|
$
|
(1,052
|
)
|
|
$
|
(2,052
|
)
|
|
$
|
71,791
|
|
Adjustments to reconcile net income to net cash provided by operating activities
|
Deferred income taxes
|
|
$
|
(80,314
|
)
|
|
$
|
6,430
|
|
|
$
|
450
|
|
|
$
|
878
|
|
|
$
|
(72,556
|
)
|
Net losses (gains) on derivative instruments and investments
|
|
$
|
12,910
|
|
|
$
|
3,626
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,536
|
|
Change in operating assets and liabilities:
|
Inventories
|
|
$
|
3,608
|
|
|
$
|
4,677
|
|
|
$
|
604
|
|
|
$
|
1,174
|
|
|
$
|
10,063
|
|
Derivative assets (liabilities), net
|
|
$
|
(10,583
|
)
|
|
$
|
288
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(10,295
|
)
|
Net cash provided by operating activities
|
|
$
|
27,628
|
|
|
$
|
(2
|
)
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
27,628
|
|
The respective impacts to net income, retained earnings, accumulated other comprehensive income (loss) and total stockholders’ equity shown above have also been reflected in the consolidated statements of comprehensive income (loss) and stockholders’ equity for the fiscal years ended June 30, 2017 and 2016. The resulting impacts adjusted previously reported unrealized (losses) gains on derivative instruments designated as cash flow hedges, net of tax for the fiscal years ended June 30, 2017 and 2016 of
$(2.9) million
and
$0.2 million
, respectively, to
$(2.9) million
and
$0.4 million
, respectively. Losses (gains) on derivative instruments designated as cash flow hedges reclassified to cost of goods sold, net of tax increased from
$(1.1) million
and
$8.1 million
for the fiscal years ended June 30, 2017 and 2016, to
$0.5 million
and
$10.3 million
, respectively. Total comprehensive income, net of tax, for the fiscal years ended June 30, 2017 and 2016 decreased from
$27.9 million
and
$86.7 million
, respectively, to
$27.6 million
and
$71.0 million
, respectively.
If the Company had continued to account for coffee, tea and culinary product inventories under LIFO, the impact to the Company's balance sheet at June 30, 2018 would have been a decrease of
$18.1 million
in inventories, an increase of
$4.2 million
in deferred income taxes, a decrease of
$17.5 million
in retained earnings and an increase of
$3.6 million
in accumulated other comprehensive loss. The impact to the Company's consolidated statement of operations for the fiscal year ended June 30, 2018 would have been an decrease in cost of goods sold and an increase in gross profit, income from operations and income before taxes of
$1.7 million
, an additional income tax benefit of
$0.9 million
, an impact to net income of
$2.6 million
, and an increase of
$0.15
in both basic and diluted earnings per common share available to common stockholders.
If the Company had continued to expense freight costs incurred to transfer goods from a distribution center to a branch warehouse and warehousing overhead costs, the impact to the Company's balance sheet at June 30, 2018 would have been a decrease of
$5.9 million
in inventories, an increase of
$1.4 million
in deferred income taxes and a decrease of
$4.5 million
in retained earnings. The impact to the Company's consolidated statement of operations for the fiscal year ended June 30, 2018 would have been a decrease in cost of goods sold and an increase in gross profit of
$21.6 million
, an increase in selling expenses of
$23.7 million
, a decrease in income from operations and income before taxes of
$2.1 million
, an additional income tax benefit of
$1.0 million
, an impact to net income of
$3.1 million
, and an increase of
$0.19
in both basic and diluted earnings per common share available to common stockholders.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 4. Acquisitions
China Mist Brands, Inc.
On October 11, 2016, the Company acquired substantially all of the assets and certain specified liabilities of China Mist, a provider of flavored and unflavored iced and hot teas. As part of the transaction, the Company assumed the lease on China Mist’s existing
17,400
square foot facility in Scottsdale, Arizona which is terminable upon twelve months’ notice.
The Company acquired China Mist for aggregate purchase consideration of
$12.2 million
, consisting of
$11.2 million
in cash paid at closing including estimated working capital adjustments of
$0.4 million
, post-closing final working capital adjustments of
$0.6 million
, and up to
$0.5 million
in contingent consideration to be paid as earnout if certain sales levels are achieved in the calendar years of 2017 or 2018. This contingent earnout liability was estimated to have a fair value of
$0.5 million
as of the closing date and was recorded in other long-term liabilities on the Company’s consolidated balance sheet at June 30, 2017. During fiscal 2018, the Company recorded a change in the estimated fair value of contingent earnout consideration of
$(0.5) million
, resulting in a balance of
zero
as the Company does not expect the contingent sales levels to be reached.
In fiscal 2017, the Company incurred
$0.2 million
in transaction costs related to the China Mist acquisition, consisting primarily of legal and accounting expenses, which are included in general and administrative expenses in the Company's consolidated statements of operations for the fiscal year ended June 30, 2017.
No
transaction costs were incurred in fiscal 2018 relating to the China Mist acquisition.
The financial effect of this acquisition was not material to the Company’s consolidated financial statements. The Company has not presented pro forma results of operations for the acquisition because it is not significant to the Company's consolidated results of operations.
The acquisition was accounted for as a business combination. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The purchase price allocation is final.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table summarizes the final allocation of consideration transferred as of the acquisition date:
|
|
|
|
|
|
|
(In thousands)
|
Fair Value
|
|
Estimated Useful Life (years)
|
|
|
|
|
Cash paid, net of cash acquired
|
$
|
11,183
|
|
|
|
Post-closing final working capital adjustments
|
553
|
|
|
|
Contingent consideration
|
500
|
|
|
|
Total consideration
|
$
|
12,236
|
|
|
|
|
|
|
|
Accounts receivable
|
$
|
811
|
|
|
|
Inventory
|
544
|
|
|
|
Prepaid assets
|
48
|
|
|
|
Property, plant and equipment
|
189
|
|
|
|
Goodwill
|
2,927
|
|
|
|
Intangible assets:
|
|
|
|
Recipes
|
930
|
|
|
7
|
Non-compete agreement
|
100
|
|
|
5
|
Customer relationships
|
2,000
|
|
|
10
|
Trade name/Trademark—indefinite-lived
|
5,070
|
|
|
|
Accounts payable
|
(383
|
)
|
|
|
Total consideration, net of cash acquired
|
$
|
12,236
|
|
|
|
In connection with this acquisition, the Company recorded goodwill of
$2.9 million
, which is deductible for tax purposes. The Company also recorded
$3.0 million
in finite-lived intangible assets that included recipes, a non-compete agreement and customer relationships and
$5.1 million
in indefinite-lived trade name/trademark. The weighted average amortization period for the finite-lived intangible assets is
8.9
years. See
Note 14
.
The determination of the fair value of intangible assets acquired was primarily based on significant inputs not observable in an active market and thus represent Level 3 fair value measurements as defined under GAAP.
The fair value assigned to the recipes was determined utilizing the replacement cost method, which captures the direct cost of the development effort plus lost profits over the time to re-create the recipes.
The fair value assigned to the non-compete agreement was determined utilizing the with and without method. Under the with and without method, the fair value of the intangible asset is estimated based on the difference in projected earnings with the agreement in place versus projected earnings based on starting with no agreement in place. Revenue and earnings projections were significant inputs into estimating the value of China Mist's non-compete agreement.
The fair value assigned to the customer relationships was determined based on management's estimate of the retention rate and utilizing certain benchmarks. Revenue and earnings projections were also significant inputs into estimating the value of customer relationships.
The fair value assigned to the trade name/trademark was determined utilizing a multi-period excess earnings approach. Under the multi-period excess earnings approach, the fair value of the intangible asset is estimated to be the present value of future earnings attributable to the asset and this method utilizes revenue and cost projections including an assumed contributory asset charge.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
During the Company's annual intangible asset impairment test as of January 31, 2018 and assessment of the recoverability of certain finite-lived intangible assets, the Company determined that the fair value of certain China Mist intangible assets was lower than the carrying value. As a result, the Company recorded an impairment charge in fiscal 2018. See
Note 14
.
West Coast Coffee Company, Inc.
On February 7, 2017, the Company acquired substantially all of the assets and certain specified liabilities of West Coast Coffee, a coffee roaster and distributor with a focus on the convenience store, grocery and foodservice channels. As part of the transaction, the Company entered into a three-year lease on West Coast Coffee’s existing
20,400
square foot facility in Hillsboro, Oregon, which expires January 31, 2020, and assumed leases on six branch warehouses consisting of an aggregate of
24,150
square feet in Oregon, California and Nevada, expiring on various dates through November 2020. The Company acquired West Coast Coffee for aggregate purchase consideration of
$15.5 million
, which included
$14.7 million
in cash paid at closing including working capital adjustments of
$1.2 million
, post-closing final working capital adjustments of
$(0.2) million
, and up to
$1.0 million
in contingent consideration to be paid as earnout if certain sales levels are achieved in the twenty-four months following the closing. This contingent earnout liability was estimated to have a fair value of
$0.6 million
and is recorded in other current liabilities on the Company’s consolidated balance sheet at June 30, 2018 and in other long-term liabilities on the Company's consolidated balance sheet at June 30, 2017. The earnout is estimated to be paid within twenty-four months following the closing.
In fiscal 2017, the Company incurred
$0.3 million
in transaction costs related to the West Coast Coffee acquisition, consisting primarily of legal and accounting expenses, which are included in general and administrative expenses in the Company's consolidated statements of operations for the fiscal year ended June 30, 2017. No transaction costs were incurred in fiscal 2018 relating to the West Coast Coffee acquisition.
The financial effect of this acquisition was not material to the Company’s consolidated financial statements. The Company has not presented pro forma results of operations for the acquisition because it is not significant to the Company's consolidated results of operations.
The acquisition was accounted for as a business combination. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The purchase price allocation is final.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table summarizes the final allocation of consideration transferred as of the acquisition date:
|
|
|
|
|
|
|
(In thousands)
|
Fair Value
|
|
Estimated Useful Life (years)
|
|
|
|
|
Cash paid, net of cash acquired
|
$
|
14,671
|
|
|
|
Post-closing final working capital adjustments
|
(218
|
)
|
|
|
Fair value of contingent consideration
|
600
|
|
|
|
Total consideration
|
$
|
15,053
|
|
|
|
|
|
|
|
Accounts receivable
|
$
|
956
|
|
|
|
Inventory
|
910
|
|
|
|
Prepaid assets
|
16
|
|
|
|
Property, plant and equipment
|
1,546
|
|
|
|
Goodwill
|
7,630
|
|
|
|
Intangible assets:
|
|
|
|
Non-compete agreements
|
100
|
|
|
5
|
Customer relationships
|
4,400
|
|
|
10
|
Trade name—finite-lived
|
260
|
|
|
7
|
Brand name—finite-lived
|
250
|
|
|
1.7
|
Accounts payable
|
(833
|
)
|
|
|
Other liabilities
|
(182
|
)
|
|
|
Total consideration, net of cash acquired
|
$
|
15,053
|
|
|
|
In connection with this acquisition, the Company recorded goodwill of
$7.6 million
, which is deductible for tax purposes. The Company also recorded
$5.0 million
in finite-lived intangible assets that included non-compete agreements, customer relationships, a trade name and a brand name. The weighted average amortization period for the finite-lived intangible assets is
9.3
years. See
Note 14
.
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 non-compete agreements was determined utilizing the with and without method. Under the with and without method, the fair value of the intangible asset is estimated based on the difference in projected earnings with the agreements in place versus projected earnings based on starting with no agreements in place. Revenue and earnings projections were significant inputs into estimating the value of West Coast Coffee's non-compete agreements.
The fair value assigned to the customer relationships was determined utilizing a multi-period excess earnings approach. Under the multi-period excess earnings approach, the fair value of the intangible asset is estimated to be the present value of future earnings attributable to the asset and this method utilizes revenue and cost projections including an assumed contributory asset charge.
The fair values assigned to the trade name and the brand name were determined utilizing the relief from royalty method. The relief from royalty method is based on the premise that the intangible asset owner would be willing to pay a royalty rate to license the subject asset. The analysis involves forecasting revenue over the life of the asset, applying a royalty rate and a tax rate, and then discounting the savings back to present value at an appropriate discount rate.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Boyd Coffee Company
On
October 2, 2017
(“Closing Date”), the Company acquired substantially all of the assets and certain specified liabilities of Boyd Coffee, a coffee roaster and distributor with a focus on restaurants, hotels, and convenience stores on the West Coast of the United States. The acquired business of Boyd Coffee (the “Boyd Business”) is expected to add to the Company’s product portfolio, improve the Company's growth potential, deepen the Company’s distribution footprint and increase the Company's capacity utilization at its production facilities.
At closing, as consideration for the purchase, the Company paid the Seller
$38.9 million
in cash from borrowings under its senior secured revolving credit facility (see
Note 16
), and issued to Boyd Coffee
14,700
shares of the Company’s Series A Preferred Stock, with a fair value of
$11.8 million
as of the Closing Date. Additionally, the Company held back
$3.2 million
in cash (“Holdback Cash Amount”) and
6,300
shares of Series A Preferred Stock (“Holdback Stock”) with a fair value of
$4.8 million
as of the Closing Date, for the satisfaction of any post-closing net working capital adjustment and to secure the Seller’s (and the other seller parties’) indemnification obligations under the purchase agreement. Any Holdback Cash Amount and Holdback Stock not used to satisfy any post-closing net working capital adjustment or any 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. As the Company has not made this payment as of
June 30, 2018
and expects settling the pension liability will take greater than twelve months, the Multiemployer Plan Holdback is recorded in other long-term liabilities on the Company’s consolidated balance sheet at
June 30, 2018
. See
Note 20
.
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. Although the purchase price allocation is final, the parties are in the process of determining the final net working capital under the purchase agreement. At
June 30, 2018
, the Company's best estimate of the post-closing net working capital adjustment is
$(8.1) million
, which is reflected in the final purchase price allocation set forth below.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table summarizes the final allocation of consideration transferred as of the acquisition date:
|
|
|
|
|
|
|
(In thousands)
|
Fair Value
|
|
Estimated
Useful Life
(years)
|
|
|
|
|
Cash paid
|
$
|
38,871
|
|
|
|
Holdback Cash Amount
|
3,150
|
|
|
|
Multiemployer Plan Holdback
|
1,056
|
|
|
|
Fair value of Series A Preferred Stock (14,700 shares)(1)
|
11,756
|
|
|
|
Fair value of Holdback Stock (6,300 shares)(1)
|
4,825
|
|
|
|
Estimated post-closing net working capital adjustment
|
(8,059
|
)
|
|
|
Total consideration
|
$
|
51,599
|
|
|
|
|
|
|
|
Accounts receivable
|
$
|
7,503
|
|
|
|
Inventory
|
9,415
|
|
|
|
Prepaid expense and other assets
|
1,951
|
|
|
|
Property, plant and equipment
|
4,936
|
|
|
|
Goodwill
|
25,395
|
|
|
|
Intangible assets:
|
|
|
|
Customer relationships
|
16,000
|
|
|
10
|
Trade name/trademark—indefinite-lived
|
3,100
|
|
|
|
Accounts payable
|
(15,080
|
)
|
|
|
Other liabilities
|
(1,621
|
)
|
|
|
Total consideration
|
$
|
51,599
|
|
|
|
______________
(1) Fair value of Series A Preferred Stock and Holdback Stock as of the Closing Date, estimated as the sum of (a) the present value of the dividends payable thereon and (b) the stated value of the Series A Preferred Stock or Holdback Stock, as the case may be, adjusted for both the conversion premium and the discount for lack of marketability arising from conversion restrictions.
In connection with this acquisition, the Company recorded goodwill of
$25.4 million
, which is deductible for tax purposes. The Company also recorded
$16.0 million
in finite-lived intangible assets that included customer relationships and
$3.1 million
in indefinite-lived intangible assets that included a trade name/trademark. The amortization period for the finite-lived intangible assets is
10.0
years. See
Note 14
.
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
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
included in the Company’s consolidated statements of operations for the fiscal year ended
June 30, 2018
:
|
|
|
|
|
|
(In thousands)
|
|
June 30, 2018
|
Net sales
|
|
$
|
67,385
|
|
Income before taxes
|
|
$
|
1,572
|
|
The Company considers the acquisition to be material to the Company’s consolidated 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 fiscal years ended June 30, 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 year.
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
Net sales
|
|
$
|
628,526
|
|
|
$
|
636,969
|
|
(Loss) income before taxes
|
|
$
|
(642
|
)
|
|
$
|
36,969
|
|
At closing, the parties entered into a transition services agreement where the Seller agreed to provide certain accounting, marketing, human resources, information technology, sales and distribution and other administrative support during a transition period of up to 12 months. The Company also entered into a co-manufacturing agreement with the Seller for a transition period of up to 12 months as the Company transitions manufacturing into its production facilities. Amounts paid by the Company to the Seller for these services totaled
$25.4 million
in the fiscal year ended June 30, 2018.
The Company has incurred acquisition and integration costs related to the Boyd Business acquisition, consisting primarily of legal and consulting expenses and one-time payroll and benefit expenses of
$7.6 million
and
$1.7 million
during the fiscal years ended June 30, 2018 and 2017, respectively, which are included in operating expenses in the Company's consolidated statements of operations.
Note 5. Restructuring Plans
Corporate Relocation Plan
On February 5, 2015, the Company announced the Corporate Relocation Plan to close its Torrance, California facility and relocate its corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California to the New Facility in Northlake, Texas. Approximately
350
positions were impacted as a result of the Torrance Facility closure. The Company’s decision resulted from a comprehensive review of alternatives designed to make the Company more competitive and better positioned to capitalize on growth opportunities.
Expenses related to the Corporate Relocation Plan in fiscal 2017 consisted of
$1.1 million
in employee retention and separation benefits,
$6.2 million
in facility-related costs including lease of temporary office space, costs associated with the move of the Company's headquarters and the relocation of certain distribution operations and
$1.3 million
in other related costs including travel, legal, consulting and other professional services. Facility-related costs in fiscal 2017 also included
$2.5 million
in non-cash charges, including
$1.1 million
in depreciation expense associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and
$1.4 million
in non-cash rent expense recognized in the sale-leaseback of the Torrance Facility. The Company completed the Corporate Relocation Plan in the fourth quarter of fiscal 2017 and has no outstanding balances as of June 30, 2018.
The Company estimated that it would incur approximately
$31 million
in cash costs in connection with the Corporate Relocation Plan consisting of
$18 million
in employee retention and separation benefits,
$5 million
in facility-related costs and
$8 million
in other related costs. Since the adoption of the Corporate Relocation Plan through June 30, 2018, the Company has recognized a total of
$31.8 million
in aggregate cash costs including
$17.4 million
in employee retention and separation benefits,
$7.0 million
in facility-related costs related to the temporary office space, costs associated with the move of the Company's headquarters, relocation of the Company’s Torrance operations and certain distribution operations
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
and
$7.4 million
in other related costs. The Company also recognized from inception through June 30, 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. The Company may incur certain pension-related costs in connection with the Corporate Relocation Plan. See
Note 15
.
The following table sets forth the activity in liabilities associated with the Corporate Relocation Plan from the time of adoption of the Corporate Relocation Plan through the fiscal year ended
June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
Balances,
June 30, 2014
|
|
Additions
|
|
Payments
|
|
Non-Cash Settled
|
|
Adjustments
|
|
Balances,
June 30, 2018
|
Employee-related costs
|
$
|
—
|
|
|
$
|
17,352
|
|
|
$
|
17,352
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Facility-related costs(1)
|
—
|
|
|
10,779
|
|
|
7,048
|
|
|
3,731
|
|
|
—
|
|
|
—
|
|
Other
|
—
|
|
|
7,424
|
|
|
7,424
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total(1)
|
$
|
—
|
|
|
$
|
35,555
|
|
|
$
|
31,824
|
|
|
$
|
3,731
|
|
|
$
|
—
|
|
|
$
|
—
|
|
_______________
(1) Non-cash settled facility-related costs represent (a) depreciation expense associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and included in “Property, plant and equipment, net” on the Company's consolidated balance sheets and (b) non-cash rent expense recognized in the sale-leaseback of the Torrance Facility.
DSD Restructuring Plan
On February 21, 2017, the Company announced the DSD Restructuring Plan to reorganize its DSD operations in an effort to realign functions into a channel-based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results. The strategic decision to undertake the DSD Restructuring Plan resulted from an ongoing operational review of various initiatives within the DSD selling organization. The Company has revised its estimated time of completion of the DSD Restructuring Plan from the end of calendar 2018 to the end of fiscal 2019.
The Company estimates that it will recognize approximately
$3.7 million
to
$4.9 million
of pre-tax restructuring charges in connection with the DSD Restructuring Plan by the end of fiscal 2019 consisting of approximately
$1.9 million
to
$2.7 million
in employee-related costs, including severance, prorated bonuses for bonus eligible employees, contractual termination payments and outplacement services, and
$1.8 million
to
$2.2 million
in other related costs, including legal, recruiting, consulting, other professional services, and travel. The Company may also incur other charges due to events that may occur as a result of, or associated with, the DSD Restructuring Plan.
Expenses related to the DSD Restructuring Plan in fiscal 2018 consisted of
$0.2 million
in employee-related costs and
$0.5 million
in other related costs. Since the adoption of the DSD Restructuring Plan through June 30, 2018, the Company has recognized a total of
$3.1 million
in aggregate cash costs including
$1.3 million
in employee-related costs and
$1.8 million
in other related costs. As of June 30, 2018, the Company had paid a total of
$2.8 million
of these costs, and had a balance of
$0.3 million
in DSD Restructuring Plan-related liabilities on the Company's consolidated balance sheet at June 30, 2018.
Note 6. New Facility
New Facility Costs
In fiscal 2017, the Company completed the construction of, and exercised the purchase option to acquire, the New Facility. The Company commenced distribution activities at the New Facility during the second quarter of fiscal 2017 and initial production activities late in the third quarter of fiscal 2017. The Company began roasting coffee in the New Facility in the fourth quarter of fiscal 2017. The New Facility received Safe Quality Food (SQF) certification in the third quarter of fiscal 2018.
The Company estimated that the total construction costs including the cost of land for the New Facility would be approximately
$60 million
. As of June 30, 2018, the Company has incurred and paid an aggregate of
$60.8 million
in
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
construction costs, including
$42.5 million
to exercise the purchase option under the lease agreement to acquire the land and partially constructed New Facility located thereon in fiscal 2017. In addition to the costs to complete the construction of the New Facility, the Company estimated that it would incur approximately
$35 million
to
$39 million
for machinery and equipment, furniture and fixtures and related expenditures of which the Company has incurred and paid an aggregate of
$33.2 million
as of June 30, 2018, including
$4.0 million
for development management services provided by Stream Realty Partners and
$22.5 million
in connection with the construction and installation of certain production equipment in the New Facility under an amended building contract with The Haskell Company (“Haskell”). See
Note 13
.
New Facility Expansion
On February 9, 2018, the Company and Haskell entered into Task Order No. 6 pursuant to the Standard Form of Agreement between Owner and Design-Builder (AIA Document A141-2014 Edition) dated October 23, 2017. The Standard Form of Agreement serves as a master service agreement (“MSA”) between the Company and Haskell and does not contain any actual work scope or compensation amounts, but instead contemplates a number of project specific task orders (the “Task Orders”) to be executed between the parties, which will define the scope and price for particular projects to be performed under the pre-negotiated terms and conditions contained in the MSA. The MSA expires on December 31, 2021 (provided that any Task Order that is not finally complete at such time will remain in effect until completion).
Task Order 6 covers the expansion of the Company’s production lines in the New Facility including expanding capacity to support the transition of acquired business volumes. Task Order 6 includes (i) pre-construction services to define the Company’s criteria for the industrial capacity Expansion Project, (ii) specialized industrial design services for the Expansion Project, (iii) specialty industrial equipment procurement and installation, and (iv) all construction services necessary to complete any modifications to the New Facility in order to accommodate the production line expansion, and to provide power to that expanded production capability. While the Company and Haskell have previously executed Task Orders 1-5, Task Order 6 includes the work and services to be performed under Task Orders 1-5 and, accordingly, Task Orders 1-5 have been superseded and voided by Task Order 6.
Task Order 6 is a guaranteed maximum price contract. Specifically, the maximum price payable by the Company to Haskell under Task Order 6 for all of Haskell’s services, equipment procurement and installation, and construction work in connection with the Expansion Project is
$19.3 million
. In fiscal 2018, the Company paid
$10.7 million
for machinery and equipment expenditures associated with the Expansion Project, with the balance of up to the guaranteed maximum price of
$19.3 million
expected to be paid in fiscal 2019. See
Note 13
and
Note 24
.
Note 7. Sales of Assets
Sale of Spice Assets
In order to focus on its core products, on December 8, 2015, the Company completed the sale of the Spice Assets to Harris. Harris acquired substantially all of the Company’s personal property used exclusively in connection with the manufacture, processing and distribution of raw, processed and blended spices and certain other culinary products (collectively, the “Spice Assets”), including certain equipment; trademarks, trade names and other intellectual property assets; contract rights under sales and purchase orders and certain other agreements; and a list of certain customers, other than the Company’s DSD customers, and assumed certain liabilities relating to the Spice Assets. The Company received
$6.0 million
in cash at closing, and is eligible to receive an earnout amount of up to
$5.0 million
over a
three
year period based upon a percentage of certain institutional spice sales by Harris following the closing. Gain from the earnout on the sale is recognized when earned and when realization is assured beyond a reasonable doubt. The Company recognized
$0.8 million
,
$1.0 million
and
$0.5 million
in earnout during the fiscal years ended June 30, 2018, 2017 and 2016, respectively, a portion of which is included in “Net gains from sale of Spice Assets” in the Company's consolidated statements of operations. The sale of the Spice Assets does not represent a strategic shift for the Company and is not expected to have a material impact on the Company's results of operations because the Company will continue to sell a complete portfolio of spice and other culinary products purchased from Harris under a supply agreement to its DSD customers.
Sale of Torrance Facility
On July 15, 2016, the Company completed the sale of the Torrance Facility, consisting of approximately
665,000
square feet of buildings located on approximately
20.3
acres of land, for an aggregate cash sale price of
$43.0 million
, which
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
sale price was subject to customary adjustments for closing costs and documentary transfer taxes. Cash proceeds from the sale of the Torrance Facility were
$42.5 million
.
Following the closing of the sale, the Company leased back the Torrance Facility on a triple net basis through October 31, 2016 at zero base rent, and exercised two one-month extensions at a base rent of
$100,000
per month. In accordance with ASC 840, “Leases,” due to the Company’s continuing involvement with the property, the Company accounted for the transaction as a financing transaction, deferred the gain on sale of the Torrance Facility and recorded the net sale proceeds of
$42.5 million
and accrued non-cash interest expense on the financing transaction in “Sale-leaseback financing obligation” on the Company's consolidated balance sheet at September 30, 2016. The Company vacated the Torrance Facility in December 2016 and concluded the leaseback transaction. As a result, at December 31, 2016, the financing transaction qualified for sales recognition under ASC 840. Accordingly, in the fiscal year ended June 30, 2017, the Company recognized the net gain from sale of the Torrance Facility in the amount of
$37.4 million
, including non-cash interest expense of
$0.7 million
and non-cash rent expense of
$1.4 million
, representing the rent for the zero base rent period previously recorded in “Other current liabilities” and removed the amounts recorded in “Assets held for sale” and the “Sale-leaseback financing obligation” on its consolidated balance sheet.
Sale of Northern California Branch Property
On September 30, 2016, the Company completed the sale of its branch property in Northern California for a sale price of
$2.2 million
and leased it back through March 31, 2017, at a base rent of
$10,000
per month. The Company recognized a net gain on sale of the Northern California property in fiscal 2017 in the amount of
$2.0 million
.
Note 8. Derivative Instruments
Derivative Instruments Held
Coffee-Related Derivative Instruments
The Company is exposed to commodity price risk associated with its PTF green coffee purchase contracts, which are described further in
Note 2
. The Company utilizes forward and option contracts to manage exposure to the variability in expected future cash flows from forecasted purchases of green coffee attributable to commodity price risk. Certain of these coffee-related derivative instruments utilized for risk management purposes have been designated as cash flow hedges, while other coffee-related derivative instruments have not been designated as cash flow hedges or do not qualify for hedge accounting despite hedging the Company's future cash flows on an economic basis.
The following table summarizes the notional volumes for the coffee-related derivative instruments held by the Company at June 30, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
Long coffee pounds
|
|
40,913
|
|
|
33,038
|
|
Derivative instruments not designated as cash flow hedges:
|
|
|
|
|
Long coffee pounds
|
|
2,546
|
|
|
2,121
|
|
Total
|
|
43,459
|
|
|
35,159
|
|
Coffee-related derivative instruments designated as cash flow hedges outstanding as of
June 30, 2018
will expire within
18 months
.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Effect of Derivative Instruments on the Financial Statements
Balance Sheets
Fair values of derivative instruments on the Company's consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
Designated as Cash Flow Hedges
|
|
Derivative Instruments Not Designated as Accounting Hedges
|
|
|
June 30,
|
|
June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Financial Statement Location:
|
|
|
|
|
|
|
|
|
Short-term derivative assets(1):
|
|
|
|
|
|
|
|
|
Coffee-related derivative instruments
|
|
$
|
—
|
|
|
$
|
66
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term derivative assets(2):
|
|
|
|
|
|
|
|
|
Coffee-related derivative instruments
|
|
$
|
—
|
|
|
$
|
66
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Short-term derivative liabilities(1):
|
|
|
|
|
|
|
|
|
Coffee-related derivative instruments
|
|
$
|
3,081
|
|
|
$
|
1,733
|
|
|
$
|
219
|
|
|
$
|
190
|
|
Long-term derivative liabilities(2):
|
|
|
|
|
|
|
|
|
Coffee-related derivative instruments
|
|
$
|
386
|
|
|
$
|
446
|
|
|
$
|
—
|
|
|
$
|
—
|
|
________________
(1) Included in “Short-term derivative liabilities” on the Company's consolidated balance sheets.
(2) Included in “Other long-term liabilities” on the Company's consolidated balance sheets.
Statements of Operations
The following table presents pretax net gains and losses for the Company's coffee-related derivative instruments designated as cash flow hedges, as recognized in “AOCI,” “Cost of goods sold” and “Other, net” (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
).
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
Financial Statement Classification
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
|
|
Net (losses) gains recognized in AOCI
|
|
$
|
(8,420
|
)
|
|
$
|
(4,746
|
)
|
|
$
|
592
|
|
|
|
AOCI
|
Net losses recognized in earnings
|
|
$
|
(1,179
|
)
|
|
$
|
(835
|
)
|
|
$
|
(16,810
|
)
|
|
|
Costs of goods sold
|
Net gains (losses) recognized in earnings (ineffective portion)(1)
|
|
$
|
48
|
|
|
$
|
(456
|
)
|
|
$
|
(575
|
)
|
|
|
Other, net
|
________________
(1) Amount included in fiscal year ended June 30, 2018 relates to trades terminated prior to the adoption of ASU 2017-12. See
Note 2
.
For the fiscal years ended June 30, 2018, 2017 and 2016, there were
no
gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness or as a result of reclassifications to earnings following the discontinuance of any cash flow hedges.
Net losses (gains) on derivative instruments in the Company's consolidated statements of cash flows also includes net losses (gains) on coffee-related derivative instruments designated as cash flow hedges reclassified to cost of goods sold from AOCI in the fiscal years ended June 30, 2018, 2017 and 2016. Gains and losses on derivative instruments not designated as accounting hedges are included in “Other, net” in the Company's consolidated statements of operations and in “Net losses (gains) on derivative instruments and investments” in the Company's consolidated statements of cash flows.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Net gains and losses recorded in “Other, net” are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
Net losses on coffee-related derivative instruments
|
|
$
|
(469
|
)
|
|
$
|
(1,812
|
)
|
|
$
|
(298
|
)
|
Net gains on investments
|
|
7
|
|
|
286
|
|
|
611
|
|
Net (losses) gains on derivative instruments and investments(1)
|
|
(462
|
)
|
|
(1,526
|
)
|
|
313
|
|
Other gains, net(2)
|
|
1,533
|
|
|
325
|
|
|
243
|
|
Other, net
|
|
$
|
1,071
|
|
|
$
|
(1,201
|
)
|
|
$
|
556
|
|
___________
(1) Excludes net losses and net gains on coffee-related derivative instruments designated as cash flow hedges recorded in cost of goods sold in the fiscal years ended June 30, 2018, 2017 and 2016.
(2) Includes
$(0.5) million
change in estimated fair value of the China Mist contingent earnout consideration in the fiscal year ended June 30, 2018.
Offsetting of Derivative Assets and Liabilities
The Company has agreements in place that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, the Company maintains accounts with its brokers to facilitate financial derivative transactions in support of its risk management activities. Based on the value of the Company’s positions in these accounts and the associated margin requirements, the Company may be required to deposit cash into these broker accounts.
The following table presents the Company’s net exposure from its offsetting derivative asset and liability positions, as well as cash collateral on deposit with its counterparty as of the reporting dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Gross Amount Reported on Balance Sheet
|
|
Netting Adjustments
|
|
Cash Collateral Posted
|
|
Net Exposure
|
June 30, 2018
|
|
Derivative Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Derivative Liabilities
|
|
$
|
3,686
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,686
|
|
June 30, 2017
|
|
Derivative Assets
|
|
$
|
132
|
|
|
$
|
(132
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Derivative Liabilities
|
|
$
|
2,369
|
|
|
$
|
(132
|
)
|
|
$
|
—
|
|
|
$
|
2,237
|
|
Cash Flow Hedges
Changes in the fair value of the Company's coffee-related derivative instruments designated as cash flow hedges, to the extent effective, are deferred in AOCI and reclassified into cost of goods sold in the same period or periods in which the hedged forecasted purchases affect earnings, or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. Based on recorded values at June 30, 2018,
$(7.2) million
of net losses on coffee-related derivative instruments designated as cash flow hedges are expected to be reclassified into cost of goods sold within the next twelve months. These recorded values are based on market prices of the commodities as of June 30, 2018. At
June 30, 2018
and 2017 approximately
94%
of the Company's outstanding coffee-related derivative instruments were designated as cash flow hedges.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 9. Investments
In fiscal 2017, the Company liquidated substantially all of its trading securities to fund expenditures associated with its New Facility in Northlake, Texas. In fiscal 2018, the Company liquidated the remaining security and closed its preferred stock portfolio. The Company had no short-term investments at June 30, 2018 and
$0.4 million
in short-term investments at June 30, 2017.
The following table shows gains and losses on trading securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
Total gains recognized from trading securities
|
|
$
|
7
|
|
|
$
|
286
|
|
|
$
|
611
|
|
Less: Realized gains from sales of trading securities
|
|
7
|
|
|
1,909
|
|
|
29
|
|
Unrealized (losses) gains from trading securities
|
|
$
|
—
|
|
|
$
|
(1,623
|
)
|
|
$
|
582
|
|
Note 10. Fair Value Measurements
Assets and liabilities measured and recorded at fair value on a recurring basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
June 30, 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
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
June 30, 2017
|
|
|
|
|
|
|
|
|
Preferred stock(2)
|
|
$
|
368
|
|
|
$
|
—
|
|
|
$
|
368
|
|
|
$
|
—
|
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
Coffee-related derivative assets(1)
|
|
$
|
132
|
|
|
$
|
—
|
|
|
$
|
132
|
|
|
$
|
—
|
|
Coffee-related derivative liabilities(1)
|
|
$
|
2,179
|
|
|
$
|
—
|
|
|
$
|
2,179
|
|
|
$
|
—
|
|
Derivative instruments not designated as accounting hedges:
|
|
|
|
|
|
|
|
|
Coffee-related derivative liabilities(1)
|
|
$
|
190
|
|
|
$
|
—
|
|
|
$
|
190
|
|
|
$
|
—
|
|
____________________
|
|
(1)
|
The Company's coffee-related derivative instruments are traded over-the-counter and, therefore, classified as Level 2.
|
|
|
(2)
|
Included in “Short-term investments” on the Company's consolidated balance sheet at June 30, 2017.
|
During the fiscal years ended June 30, 2018 and 2017, there were no transfers between the levels.
Note 11. Accounts Receivable, Net
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
Trade receivables
|
|
$
|
54,547
|
|
|
$
|
44,531
|
|
Other receivables(1)
|
|
4,446
|
|
|
2,636
|
|
Allowance for doubtful accounts
|
|
(495
|
)
|
|
(721
|
)
|
Accounts receivable, net
|
|
$
|
58,498
|
|
|
$
|
46,446
|
|
__________
(1) At June 30, 2018 and 2017, respectively, the Company had recorded
$0.3 million
and
$0.4 million
in “Other receivables“ included in “Accounts receivable, net“ on its consolidated balance sheets representing earnout receivable from Harris.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Allowance for doubtful accounts:
|
|
|
|
|
(In thousands)
|
|
Balance at June 30, 2015
|
$
|
(643
|
)
|
Provision
|
(71
|
)
|
Write-off
|
—
|
|
Balance at June 30, 2016
|
$
|
(714
|
)
|
Provision
|
(325
|
)
|
Write-off
|
318
|
|
Balance at June 30, 2017
|
$
|
(721
|
)
|
Provision
|
(909
|
)
|
Write-off
|
1,530
|
|
Recoveries
|
(395
|
)
|
Balance at June 30, 2018
|
$
|
(495
|
)
|
Note 12. Inventories
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
(In thousands)
|
|
2018
|
|
2017(1)
|
Coffee
|
|
|
|
|
Processed
|
|
$
|
26,882
|
|
|
$
|
23,562
|
|
Unprocessed
|
|
37,097
|
|
|
25,605
|
|
Total
|
|
$
|
63,979
|
|
|
$
|
49,167
|
|
Tea and culinary products
|
|
|
|
|
Processed
|
|
$
|
32,406
|
|
|
$
|
26,260
|
|
Unprocessed
|
|
1,161
|
|
|
94
|
|
Total
|
|
$
|
33,567
|
|
|
$
|
26,354
|
|
Coffee brewing equipment parts
|
|
$
|
6,885
|
|
|
$
|
4,269
|
|
Total inventories
|
|
$
|
104,431
|
|
|
$
|
79,790
|
|
_______
(1) 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
.
In addition to product cost, inventory costs include expenditures such as direct labor and certain supply, freight, warehousing, overhead variances, PPVs and other expenses incurred in bringing the inventory to its existing condition and location. The “Unprocessed” inventory values as stated in the above table represent the value of raw materials and the “Processed” inventory values represent all other products consisting primarily of finished goods. See
Note 3
.
Inventories were higher at the end of fiscal 2018 as compared to fiscal 2017 due to the addition of Boyd Coffee. Inventories were higher at the end of fiscal 2017 as compared to fiscal 2016 due to the commencement of the New Facility's manufacturing operations and incremental inventory from China Mist and West Coast Coffee as compared to lower levels of inventory at the Torrance Facility at the end of fiscal 2016 due to its anticipated closing. Notwithstanding this increase in total inventories at the end of fiscal 2017 compared to fiscal 2016 levels, inventories of manufactured spice products decreased at the end of fiscal 2017 compared to fiscal 2016 levels, primarily due to the liquidation of spice inventories in connection with the sale of the Spice Assets.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 13. Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
Buildings and facilities
|
|
$
|
108,590
|
|
|
$
|
108,682
|
|
Machinery and equipment
|
|
231,581
|
|
|
201,236
|
|
Equipment under capital leases
|
|
1,408
|
|
|
7,540
|
|
Capitalized software
|
|
24,569
|
|
|
21,794
|
|
Office furniture and equipment
|
|
13,721
|
|
|
12,758
|
|
|
|
$
|
379,869
|
|
|
$
|
352,010
|
|
Accumulated depreciation
|
|
(209,498
|
)
|
|
(192,280
|
)
|
Land
|
|
16,218
|
|
|
16,336
|
|
Property, plant and equipment, net
|
|
$
|
186,589
|
|
|
$
|
176,066
|
|
Capital leases consisted mainly of vehicle leases at June 30, 2018 and 2017. Depreciation and amortization expense includes amortization expense for assets recorded under capitalized leases.
The Company capitalized coffee brewing equipment (included in machinery and equipment) in the amounts of
$12.1 million
and
$10.8 million
in fiscal 2018 and 2017, respectively. Depreciation expense related to the capitalized coffee brewing equipment reported as cost of goods sold was
$8.6 million
,
$9.1 million
and
$9.8 million
in fiscal 2018, 2017 and 2016, respectively.
Maintenance and repairs to property, plant and equipment charged to expense for the years ended June 30, 2018, 2017, and 2016 were
$9.6 million
,
$8.0 million
and
$7.7 million
, respectively.
Note 14. Goodwill and Intangible Assets
The following is a summary of changes in the carrying value of goodwill:
|
|
|
|
|
|
(In thousands)
|
Balance at June 30, 2016
|
|
$
|
272
|
|
Additions (China Mist)
|
|
2,927
|
|
Additions (West Coast Coffee)
|
|
7,797
|
|
Balance at June 30, 2017
|
|
$
|
10,996
|
|
Final Purchase Price Allocation Adjustment (West Coast Coffee)
|
|
(167
|
)
|
Additions (Boyd Coffee)
|
|
25,395
|
|
Balance at June 30, 2018
|
|
$
|
36,224
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following is a summary of the Company’s amortized and unamortized intangible assets other than goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
June 30, 2017
|
(In thousands)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
33,003
|
|
|
$
|
(12,903
|
)
|
|
$
|
17,353
|
|
|
$
|
(10,883
|
)
|
Non-compete agreements
|
|
220
|
|
|
(81
|
)
|
|
220
|
|
|
(38
|
)
|
Recipes
|
|
930
|
|
|
(221
|
)
|
|
930
|
|
|
(88
|
)
|
Trade name/brand name
|
|
510
|
|
|
(271
|
)
|
|
510
|
|
|
(84
|
)
|
Total amortized intangible assets
|
|
$
|
34,663
|
|
|
$
|
(13,476
|
)
|
|
$
|
19,013
|
|
|
$
|
(11,093
|
)
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks, trade names and brand name with indefinite lives
|
|
$
|
10,328
|
|
|
$
|
—
|
|
|
$
|
10,698
|
|
|
$
|
—
|
|
Total unamortized intangible assets
|
|
$
|
10,328
|
|
|
$
|
—
|
|
|
$
|
10,698
|
|
|
$
|
—
|
|
Total intangible assets
|
|
$
|
44,991
|
|
|
$
|
(13,476
|
)
|
|
$
|
29,711
|
|
|
$
|
(11,093
|
)
|
In fiscal 2018, the Company recorded an impairment charge related to indefinite-lived intangible assets of
$3.5 million
. There were
no
indefinite-lived intangible asset impairment charges recorded in the fiscal years ended June 30, 2017 and 2016. In fiscal 2018, the Company recorded an impairment charge related to other intangible assets of
$0.3 million
. There were
no
other intangible asset impairment charges recorded in the fiscal years ended June 30, 2017 and 2016.
Aggregate amortization expense for the past three fiscal years:
|
|
|
|
|
|
(In thousands)
|
|
|
For the fiscal year ended:
|
|
|
June 30, 2018
|
|
$
|
2,383
|
|
June 30, 2017
|
|
$
|
710
|
|
June 30, 2016
|
|
$
|
200
|
|
Estimated amortization expense for the next five fiscal years:
|
|
|
|
|
|
(In thousands)
|
|
|
For the fiscal year ending:
|
|
|
June 30, 2019
|
|
$
|
2,646
|
|
June 30, 2020
|
|
$
|
2,431
|
|
June 30, 2021
|
|
$
|
2,415
|
|
June 30, 2022
|
|
$
|
2,393
|
|
June 30, 2023
|
|
$
|
2,375
|
|
Remaining weighted average amortization periods for intangible assets with finite lives are as follows:
|
|
|
|
(In years)
|
|
|
Customer relationships
|
|
9.0
|
Non-compete agreements
|
|
3.5
|
Recipes
|
|
5.3
|
Trade name/brand name
|
|
4.8
|
Note 15. Employee Benefit Plans
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
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 (loss) (“OCI”) certain gains and losses that arise during the period but are deferred under pension accounting rules.
Single Employer Pension Plans
The Company has a defined benefit pension plan, the Farmer Bros. Co. Pension Plan for Salaried Employees (the “Farmer Bros. Plan”), for Company employees hired prior to January 1, 2010 who are not covered under a collective bargaining agreement. The Company amended the Farmer Bros. Plan, freezing the benefit for all participants effective June 30, 2011. After the plan freeze, participants do not accrue any benefits under the Farmer Bros. Plan, and new hires are not eligible to participate in the Farmer Bros. Plan. As all plan participants became inactive following this pension curtailment, net (gain) loss is now amortized based on the remaining life expectancy of these participants instead of the remaining service period of these participants.
The Company also has two defined benefit pension plans for certain hourly employees covered under collective bargaining agreements (the “Brewmatic Plan” and the “Hourly Employees' Plan”). Effective October 1, 2016, the Company froze benefit accruals and participation in the Hourly Employees' Plan. After the plan freeze, participants do not accrue any benefits under the plan, and new hires are not eligible to participate in the plan. After the freeze the participants in the plan are eligible to receive the Company's matching contributions to their 401(k).
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Obligations and Funded Status
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer Bros. Plan
June 30,
|
|
Brewmatic Plan
June 30,
|
|
Hourly Employees’ Plan
June 30,
|
($ in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Change in projected benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at the beginning of the year
|
|
$
|
146,291
|
|
|
$
|
152,325
|
|
|
$
|
4,079
|
|
|
$
|
4,574
|
|
|
$
|
4,329
|
|
|
$
|
4,329
|
|
Service cost
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
124
|
|
Interest cost
|
|
5,417
|
|
|
5,277
|
|
|
149
|
|
|
157
|
|
|
163
|
|
|
152
|
|
Actuarial (gain) loss
|
|
(5,956
|
)
|
|
(4,556
|
)
|
|
(227
|
)
|
|
(370
|
)
|
|
(370
|
)
|
|
(233
|
)
|
Benefits paid
|
|
(8,577
|
)
|
|
(6,755
|
)
|
|
(277
|
)
|
|
(282
|
)
|
|
(82
|
)
|
|
(43
|
)
|
Projected benefit obligation at the end of the year
|
|
$
|
137,175
|
|
|
$
|
146,291
|
|
|
$
|
3,724
|
|
|
$
|
4,079
|
|
|
$
|
4,040
|
|
|
$
|
4,329
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at the beginning of the year
|
|
$
|
97,304
|
|
|
$
|
91,201
|
|
|
$
|
3,115
|
|
|
$
|
2,989
|
|
|
$
|
2,999
|
|
|
$
|
2,447
|
|
Actual return on plan assets
|
|
5,874
|
|
|
10,874
|
|
|
201
|
|
|
337
|
|
|
198
|
|
|
256
|
|
Employer contributions
|
|
2,610
|
|
|
1,984
|
|
|
680
|
|
|
71
|
|
|
514
|
|
|
339
|
|
Benefits paid
|
|
(8,577
|
)
|
|
(6,755
|
)
|
|
(277
|
)
|
|
(282
|
)
|
|
(82
|
)
|
|
(43
|
)
|
Fair value of plan assets at the end of the year
|
|
$
|
97,211
|
|
|
$
|
97,304
|
|
|
$
|
3,719
|
|
|
$
|
3,115
|
|
|
$
|
3,629
|
|
|
$
|
2,999
|
|
Funded status at end of year (underfunded) overfunded
|
|
$
|
(39,964
|
)
|
|
$
|
(48,987
|
)
|
|
$
|
(5
|
)
|
|
$
|
(964
|
)
|
|
$
|
(411
|
)
|
|
$
|
(1,330
|
)
|
Amounts recognized in consolidated balance sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current liabilities
|
|
(39,964
|
)
|
|
(48,987
|
)
|
|
(5
|
)
|
|
(964
|
)
|
|
(411
|
)
|
|
(1,330
|
)
|
Total
|
|
$
|
(39,964
|
)
|
|
$
|
(48,987
|
)
|
|
$
|
(5
|
)
|
|
$
|
(964
|
)
|
|
$
|
(411
|
)
|
|
$
|
(1,330
|
)
|
Amounts recognized in AOCI
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
51,079
|
|
|
59,007
|
|
|
1,788
|
|
|
2,135
|
|
|
218
|
|
|
618
|
|
Total AOCI (not adjusted for applicable tax)
|
|
$
|
51,079
|
|
|
$
|
59,007
|
|
|
$
|
1,788
|
|
|
$
|
2,135
|
|
|
$
|
218
|
|
|
$
|
618
|
|
Weighted average assumptions used to determine benefit obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
4.05
|
%
|
|
3.80
|
%
|
|
4.05
|
%
|
|
3.80
|
%
|
|
4.05
|
%
|
|
3.80
|
%
|
Rate of compensation increase
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Components of Net Periodic Benefit Cost and
Other Changes Recognized in Other Comprehensive Income (Loss) (OCI)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer Bros. Plan
June 30,
|
|
Brewmatic Plan
June 30,
|
|
Hourly Employees’ Plan
June 30,
|
($ in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
124
|
|
Interest cost
|
|
5,417
|
|
|
5,277
|
|
|
149
|
|
|
157
|
|
|
163
|
|
|
152
|
|
Expected return on plan assets
|
|
(5,490
|
)
|
|
(6,067
|
)
|
|
(161
|
)
|
|
(188
|
)
|
|
(173
|
)
|
|
(172
|
)
|
Amortization of net loss
|
|
1,588
|
|
|
1,875
|
|
|
80
|
|
|
102
|
|
|
6
|
|
|
53
|
|
Net periodic benefit cost
|
|
$
|
1,515
|
|
|
$
|
1,085
|
|
|
$
|
68
|
|
|
$
|
71
|
|
|
$
|
(4
|
)
|
|
$
|
157
|
|
Other changes recognized in OCI
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,340
|
)
|
|
$
|
(9,363
|
)
|
|
$
|
(267
|
)
|
|
$
|
(519
|
)
|
|
$
|
(394
|
)
|
|
$
|
(317
|
)
|
Amortization of net loss
|
|
(1,588
|
)
|
|
(1,875
|
)
|
|
(80
|
)
|
|
(102
|
)
|
|
(6
|
)
|
|
(53
|
)
|
Total recognized in OCI
|
|
$
|
(7,928
|
)
|
|
$
|
(11,238
|
)
|
|
$
|
(347
|
)
|
|
$
|
(621
|
)
|
|
$
|
(400
|
)
|
|
$
|
(370
|
)
|
Total recognized in net periodic benefit cost and OCI
|
|
$
|
(6,413
|
)
|
|
$
|
(10,153
|
)
|
|
$
|
(279
|
)
|
|
$
|
(550
|
)
|
|
$
|
(404
|
)
|
|
$
|
(213
|
)
|
Weighted-average assumptions used to determine net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
3.80
|
%
|
|
3.55
|
%
|
|
3.80
|
%
|
|
3.55
|
%
|
|
3.80
|
%
|
|
3.55
|
%
|
Expected long-term return on plan assets
|
|
6.75
|
%
|
|
7.75
|
%
|
|
6.75
|
%
|
|
7.75
|
%
|
|
6.75
|
%
|
|
7.75
|
%
|
Rate of compensation increase
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Basis Used to Determine Expected Long-term Return on Plan Assets
The expected long-term return on plan assets assumption was developed as a weighted average rate based on the target asset allocation of the plan and the Long-Term Capital Market Assumptions (CMA) 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.
Description of Investment Policy
The Company’s investment strategy is to build an efficient, well-diversified portfolio based on a long-term, strategic outlook of the investment markets. The investment markets outlook utilizes both the historical-based and forward-looking return forecasts to establish future return expectations for various asset classes. These return expectations are used to develop a core asset allocation based on the specific needs of each plan. The core asset allocation utilizes investment portfolios of various asset classes and multiple investment managers in order to maximize the plan’s return while providing multiple layers of diversification to help minimize risk.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Additional Disclosures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Farmer Bros. Plan
June 30,
|
|
Brewmatic Plan
June 30,
|
|
Hourly Employees’ Plan
June 30,
|
($ in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Comparison of obligations to plan assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Projected benefit obligation
|
|
$
|
137,175
|
|
|
$
|
146,291
|
|
|
$
|
3,724
|
|
|
$
|
4,079
|
|
|
$
|
4,040
|
|
|
$
|
4,329
|
|
Accumulated benefit obligation
|
|
$
|
137,175
|
|
|
$
|
146,291
|
|
|
$
|
3,724
|
|
|
$
|
4,079
|
|
|
$
|
4,040
|
|
|
$
|
4,329
|
|
Fair value of plan assets at measurement date
|
|
$
|
97,211
|
|
|
$
|
97,304
|
|
|
$
|
3,719
|
|
|
$
|
3,115
|
|
|
$
|
3,629
|
|
|
$
|
2,999
|
|
Plan assets by category
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
$
|
63,547
|
|
|
$
|
65,270
|
|
|
$
|
2,431
|
|
|
$
|
2,133
|
|
|
$
|
2,341
|
|
|
$
|
1,973
|
|
Debt securities
|
|
27,608
|
|
|
26,241
|
|
|
1,056
|
|
|
793
|
|
|
1,065
|
|
|
851
|
|
Real estate
|
|
6,056
|
|
|
5,793
|
|
|
232
|
|
|
189
|
|
|
223
|
|
|
175
|
|
Total
|
|
$
|
97,211
|
|
|
$
|
97,304
|
|
|
$
|
3,719
|
|
|
$
|
3,115
|
|
|
$
|
3,629
|
|
|
$
|
2,999
|
|
Plan assets by category
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
66
|
%
|
|
67
|
%
|
|
66
|
%
|
|
69
|
%
|
|
65
|
%
|
|
66
|
%
|
Debt securities
|
|
28
|
%
|
|
27
|
%
|
|
28
|
%
|
|
25
|
%
|
|
29
|
%
|
|
28
|
%
|
Real estate
|
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
Total
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
Fair values of plan assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Investments measured at NAV
|
Farmer Bros. Plan
|
|
$
|
97,211
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
97,211
|
|
Brewmatic Plan
|
|
$
|
3,719
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,719
|
|
Hourly Employees’ Plan
|
|
$
|
3,629
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,629
|
|
|
|
June 30, 2017
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Investments measured at NAV
|
Farmer Bros. Plan
|
|
$
|
97,304
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
97,304
|
|
Brewmatic Plan
|
|
$
|
3,115
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,115
|
|
Hourly Employees’ Plan
|
|
$
|
2,999
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,999
|
|
The following is the target asset allocation for the Company's single employer pension plans—Farmer Bros. Plan, Brewmatic Plan and Hourly Employees' Plan—for fiscal 2019:
|
|
|
|
|
Fiscal 2019
|
U.S. large cap equity securities
|
37.0
|
%
|
U.S. small cap equity securities
|
4.6
|
%
|
International equity securities
|
22.4
|
%
|
Debt securities
|
30.0
|
%
|
Real estate
|
6.0
|
%
|
Total
|
100.0
|
%
|
Estimated Amounts in OCI Expected To Be Recognized
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
In fiscal 2019, the Company expects to recognize net periodic benefit cost of
$1.3 million
for the Farmer Bros. Plan and net period benefit credit of
$(13,000)
for the Brewmatic Plan and
$(61,000)
for the Hourly Employees’ Plan.
Estimated Future Contributions and Refunds
In fiscal 2019, the Company expects to contribute
$2.5 million
to the Farmer Bros. Plan and does not expect to contribute to the Brewmatic Plan or the Hourly Employees’ Plan. The Company is not aware of any refunds expected from single employer pension plans.
Estimated Future Benefit Payments
The following benefit payments are expected to be paid over the next 10 fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Farmer Bros. Plan
|
|
Brewmatic Plan
|
|
Hourly Employees’
Plan
|
Year Ending:
|
|
|
June 30, 2019
|
|
$
|
7,740
|
|
|
$
|
330
|
|
|
$
|
110
|
|
June 30, 2020
|
|
$
|
7,790
|
|
|
$
|
280
|
|
|
$
|
130
|
|
June 30, 2021
|
|
$
|
8,010
|
|
|
$
|
280
|
|
|
$
|
150
|
|
June 30, 2022
|
|
$
|
8,210
|
|
|
$
|
270
|
|
|
$
|
160
|
|
June 30, 2023
|
|
$
|
8,360
|
|
|
$
|
260
|
|
|
$
|
170
|
|
June 30, 2024 to June 30, 2028
|
|
$
|
42,210
|
|
|
$
|
1,160
|
|
|
$
|
1,040
|
|
These amounts are based on current data and assumptions and reflect expected future service, as appropriate.
Multiemployer Pension Plans
The Company participates in
two
multiemployer defined benefit pension plans that are union sponsored and collectively bargained for the benefit of certain employees subject to collective bargaining agreements, of which the Western Conference of Teamsters Pension Plan ("WCTPP") is individually significant. The Company makes contributions to these plans generally based on the number of hours worked by the participants in accordance with the provisions of negotiated labor contracts.
The risks of participating in multiemployer pension plans are different from single-employer plans in that: (i) assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (iii) if the Company stops participating in the multiemployer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
The Company's participation in WCTPP is outlined in the table below. The Pension Protection Act (“PPA”) Zone Status available in the Company's fiscal year 2018 and fiscal year 2017 is for the plan's year ended December 31, 2017 and December 31, 2016, respectively. The zone status is based on information obtained from WCTPP and is certified by WCTPP's actuary. Among other factors, plans in the green zone are generally more than
80%
funded. Based on WCTPP's 2017 Annual Funding Notice, WCTPP was
91.2%
and
91.7%
funded for its plan year beginning January 1, 2017 and 2016, respectively, and is expected to be
92.0%
funded for its plan year beginning January 1, 2018. The “FIP/RP Status Pending/Implemented” column indicates if a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Plan
|
|
Employer
Identification
Number
|
|
Pension
Plan
Number
|
|
PPA Zone Status
|
|
FIP/RP
Status
Pending/
Implemented
|
|
Surcharge
Imposed
|
|
Expiration Date
of Collective
Bargaining
Agreements
|
|
|
July 1, 2017
|
|
July 1,
2016
|
|
|
Western Conference of Teamsters Pension Plan
|
|
91-6145047
|
|
001
|
|
Green
|
|
Green
|
|
No
|
|
No
|
|
June 30, 2022
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Based upon the most recent information available from the trustees managing the WCTPP, the Company’s share of the unfunded vested benefit liability for the plan was estimated to be approximately
$3.3 million
if the withdrawal had occurred in the plan year ending December 31, 2017. These estimates were calculated by the trustees managing WCTPP. Although the Company believes the most recent plan data available from WCTPP was used in computing this 2017 estimate, the actual withdrawal liability is subject to change based on, among other things, the plan’s investment returns and benefit levels, interest rates, financial difficulty of other participating employers in the plan such as a bankruptcy, and continued participation by the Company and other employers in the plan, each of which could impact the ultimate withdrawal liability.
On October 30, 2017, counsel to the Company received written confirmation that the Western Conference of Teamsters Pension Trust (the “WCT Pension Trust”) will be retracting its claim, stated in its letter to the Company dated July 10, 2017 (the “2017 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 applies 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 caused a partial withdrawal under the WCTPP. The Company is reviewing the asserted assessment and calculation of claimed liability and determining whether to request a review by the WCT Pension Trust of the determination of withdrawal liability. As of June 30, 2018, the Company is not able to predict whether the WCT Pension Trust may make a claim, or estimate the extent of potential withdrawal liability, related to the Corporate Relocation Plan for actions or bargaining units other than those specified in the 2017 WCT Pension Trust Letter. The amount of any potential withdrawal liability could be material to the Company's results of operations and cash flows.
In fiscal 2012, the Company withdrew from the Local 807 Labor-Management Pension Fund (“Pension Fund”) and recorded a charge of
$4.3 million
associated with withdrawal from this plan, representing the present value of the estimated withdrawal liability expected to be paid in quarterly installments of
$0.1 million
over
80
quarters. On November 18, 2014, the Pension Fund sent the Company a notice of assessment of withdrawal liability in the amount of
$4.4 million
, which the Pension Fund adjusted to
$4.9 million
on January 5, 2015. The Company is in the process of negotiating a reduced liability amount. The Company has commenced quarterly installment payments to the Pension Fund of
$91,000
pending the final settlement of the liability. The total estimated withdrawal liability is
$3.8 million
and its present value is reflected in the Company's consolidated balance sheets at June 30, 2018, as short-term with the expectation of paying off the liability in fiscal 2019. See
Note 19
.
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.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Company contributions to the multiemployer pension plans:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
WCTPP(1)(2)(3)
|
|
All Other Plans(4)
|
Year Ended:
|
|
|
|
|
June 30, 2018
|
|
1,605
|
|
|
35
|
|
June 30, 2017
|
|
$
|
2,114
|
|
|
$
|
39
|
|
June 30, 2016
|
|
$
|
2,587
|
|
|
$
|
39
|
|
____________
|
|
(1)
|
Individually significant plan.
|
|
|
(2)
|
Less than
5%
of total contribution to WCTPP based on WCTPP's FASB Disclosure Statement for the calendar year ended December 31, 2017.
|
|
|
(3)
|
The Company guarantees that one hundred seventy-three (
173
) hours will be contributed upon for all employees who are compensated for all available straight time hours for each calendar month. An additional
6.5%
of the basic contribution must be paid for PEER or the Program for Enhanced Early Retirement.
|
|
|
(4)
|
Includes one plan that is not individually significant.
|
The Company's contribution to multiemployer plans decreased in fiscal 2018 as compared to fiscal 2017 and 2016, as a result of the reduction in employees due to the Corporate Relocation Plan. The Company expects to contribute an aggregate of
$1.7 million
towards multiemployer pension plans in fiscal 2019.
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. The Company's aggregate contributions to multiemployer plans other than pension plans in the fiscal years ended June 30, 2018, 2017 and 2016 were
$4.8 million
,
$5.3 million
and
$6.3 million
, respectively. The Company expects to contribute an aggregate of
$5.1 million
towards multiemployer plans other than pension plans in fiscal 2019.
401(k) Plan
The Company's 401(k) Plan is available to all eligible employees. The Company's 401(k) match portion is available to all eligible employees who have worked more than
1,000
hours during a calendar year and were employed at the end of the calendar year. Participants in the 401(k) Plan may choose to contribute a percentage of their annual pay subject to the maximum contribution allowed by the Internal Revenue Service. The Company's matching contribution is discretionary, based on approval by the Company's Board of Directors. For the calendar years 2018, 2017 and 2016, the Company's Board of Directors approved a Company matching contribution of
50%
of an employee's annual contribution to the 401(k) Plan, up to
6%
of the employee's eligible income. The matching contributions (and any earnings thereon) vest at the rate of
20%
for each of the participant's first
5 years
of vesting service, so that a participant is fully vested in his or her matching contribution account after
5 years
of vesting service, subject to accelerated vesting under certain circumstances in connection with the Corporate Relocation Plan due to the closure of the Company’s Torrance Facility, a reduction-in-force at another Company facility designated by the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement Plans, or in connection with certain reductions-in-force that occurred during 2017. A participant is automatically vested in the event of death, disability or attainment of age
65
while employed by the Company. Employees are
100%
vested in their contributions. For employees subject to a collective bargaining agreement, the match is only available if so provided in the labor agreement.
The Company recorded matching contributions of
$2.0 million
,
$1.6 million
and
$1.6 million
in operating expenses for the fiscal years ended June 30, 2018, 2017 and 2016, respectively.
Postretirement Benefits
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees (“Retiree Medical Plan”). The plan provides medical, dental and vision coverage for retirees under age 65 and medical coverage only for retirees age 65 and above. Under this postretirement plan, the Company’s contributions toward premiums for retiree medical, dental and vision coverage for participants and dependents are scaled based on length of service, with greater Company contributions for retirees with greater length of service, subject to a maximum monthly Company contribution. The Company's retiree medical, dental and vision plan is unfunded, and its liability was calculated using an assumed discount rate of
4.3%
at
June 30, 2018
. The Company projects an initial medical trend rate of
8.1%
in fiscal 2019, ultimately reducing to
4.5%
in 10 years.
The Company also provides a postretirement death benefit (“Death Benefit”) to certain of its employees and retirees, subject, in the case of current employees, to continued employment with the Company until retirement and certain other conditions related to the manner of employment termination and manner of death. The Company records the actuarially determined liability for the present value of the postretirement death benefit. The Company has purchased life insurance policies to fund the postretirement death benefit wherein the Company owns the policy but the postretirement death benefit is paid to the employee's or retiree's beneficiary. The Company records an asset for the fair value of the life insurance policies which equates to the cash surrender value of the policies.
Retiree Medical Plan and Death Benefit
The following table shows the components of net periodic postretirement benefit cost for the Retiree Medical Plan and Death Benefit for the fiscal years ended June 30, 2018, 2017 and 2016. Net periodic postretirement benefit cost for fiscal 2018 was based on employee census information as of
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
Components of Net Periodic Postretirement Benefit Cost (Credit):
|
|
|
|
|
|
|
Service cost
|
|
$
|
609
|
|
|
$
|
760
|
|
|
$
|
1,388
|
|
Interest cost
|
|
835
|
|
|
829
|
|
|
1,194
|
|
Amortization of net gain
|
|
(841
|
)
|
|
(630
|
)
|
|
(196
|
)
|
Amortization of prior service credit
|
|
(1,757
|
)
|
|
(1,757
|
)
|
|
(1,757
|
)
|
Net periodic postretirement benefit (credit) cost
|
|
$
|
(1,154
|
)
|
|
$
|
(798
|
)
|
|
$
|
629
|
|
The difference between the assets and the Accumulated Postretirement Benefit Obligation (APBO) at the adoption of ASC 715-60 was established as a transition (asset) obligation and is amortized over the average expected future service for active employees as measured at the date of adoption. Any plan amendments that retroactively increase benefits create prior service cost. The increase in the APBO due to any plan amendment is established as a base and amortized over the average remaining years of service to the full eligibility date of active participants who are not yet fully eligible for benefits at the plan amendment date. Gains and losses due to experience different than that assumed or from changes in actuarial assumptions are not immediately recognized. The tables below show the remaining bases for the transition (asset) obligation, prior service cost (credit), and the calculation of the amortizable gain or loss.
|
|
|
|
Amortization Schedule
|
|
|
Transition (Asset) Obligation: The transition (asset) obligations have been fully amortized.
|
Prior service cost (credit)-Medical only ($ in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Date Established
|
|
Balance at
July 1, 2017
|
|
Annual
Amortization
|
|
Years Remaining
|
|
Curtailment
|
|
Balance at
June 30, 2018
|
January 1, 2008
|
|
$
|
(502
|
)
|
|
$
|
231
|
|
|
1.2
|
|
—
|
|
|
$
|
(271
|
)
|
July 1, 2012
|
|
(9,949
|
)
|
|
1,527
|
|
|
5.5
|
|
—
|
|
|
(8,422
|
)
|
|
|
$
|
(10,451
|
)
|
|
$
|
1,758
|
|
|
|
|
|
|
$
|
(8,693
|
)
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retiree Medical Plan
|
|
Death Benefit
|
|
|
Year Ended June 30,
|
|
Year Ended June 30,
|
($ in thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Amortization of Net (Gain) Loss:
|
|
|
|
|
|
|
|
|
Net (gain) loss as of July 1
|
|
$
|
(9,206
|
)
|
|
$
|
(10,298
|
)
|
|
$
|
1,201
|
|
|
$
|
1,523
|
|
Net (gain) loss subject to amortization
|
|
(9,206
|
)
|
|
(10,298
|
)
|
|
1,201
|
|
|
1,523
|
|
Corridor (10% of greater of APBO or assets)
|
|
1,280
|
|
|
1,214
|
|
|
(848
|
)
|
|
(854
|
)
|
Net (gain) loss in excess of corridor
|
|
$
|
(7,926
|
)
|
|
$
|
(9,084
|
)
|
|
$
|
353
|
|
|
$
|
669
|
|
Amortization years
|
|
8.9
|
|
|
9.7
|
|
|
6.4
|
|
|
7.0
|
|
The following tables provide a reconciliation of the benefit obligation and plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
Change in Benefit Obligation:
|
|
|
|
|
Projected postretirement benefit obligation at beginning of year
|
|
$
|
20,680
|
|
|
$
|
21,867
|
|
Service cost
|
|
609
|
|
|
760
|
|
Interest cost
|
|
835
|
|
|
829
|
|
Participant contributions
|
|
699
|
|
|
741
|
|
Actuarial losses
|
|
(70
|
)
|
|
(2,377
|
)
|
Benefits paid
|
|
(1,470
|
)
|
|
(1,140
|
)
|
Projected postretirement benefit obligation at end of year
|
|
$
|
21,283
|
|
|
$
|
20,680
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
Change in Plan Assets:
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
—
|
|
|
$
|
—
|
|
Employer contributions
|
|
771
|
|
|
399
|
|
Participant contributions
|
|
699
|
|
|
741
|
|
Benefits paid
|
|
(1,470
|
)
|
|
(1,140
|
)
|
Fair value of plan assets at end of year
|
|
$
|
—
|
|
|
$
|
—
|
|
Projected postretirement benefit obligation at end of year
|
|
21,283
|
|
|
20,680
|
|
Funded status of plan
|
|
$
|
(21,283
|
)
|
|
$
|
(20,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
Amounts Recognized in the Consolidated Balance Sheets Consist of:
|
|
|
|
|
Current liabilities
|
|
$
|
(810
|
)
|
|
$
|
(893
|
)
|
Non-current liabilities
|
|
(20,473
|
)
|
|
(19,787
|
)
|
Total
|
|
$
|
(21,283
|
)
|
|
$
|
(20,680
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
Amounts Recognized in AOCI Consist of:
|
|
|
|
|
Net gain
|
|
$
|
(8,005
|
)
|
|
$
|
(8,775
|
)
|
Prior service credit
|
|
(8,693
|
)
|
|
(10,450
|
)
|
Total AOCI
|
|
$
|
(16,698
|
)
|
|
$
|
(19,225
|
)
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
Other Changes in Plan Assets and Benefit Obligations Recognized in OCI:
|
|
|
|
|
Unrecognized actuarial loss
|
|
$
|
(70
|
)
|
|
$
|
(2,377
|
)
|
Amortization of net loss
|
|
840
|
|
|
630
|
|
Amortization of prior service cost
|
|
1,757
|
|
|
1,757
|
|
Total recognized in OCI
|
|
2,527
|
|
|
10
|
|
Net periodic benefit cost
|
|
(1,154
|
)
|
|
(798
|
)
|
Total recognized in net periodic benefit credit (cost) and OCI
|
|
$
|
1,373
|
|
|
$
|
(788
|
)
|
The estimated net gain and prior service credit that will be amortized from AOCI into net periodic benefit cost in fiscal 2019 are
$0.9 million
and
$1.8 million
, respectively.
|
|
|
|
|
(In thousands)
|
|
Estimated Future Benefit Payments:
|
|
Year Ending:
|
|
June 30, 2019
|
$
|
827
|
|
June 30, 2020
|
$
|
892
|
|
June 30, 2021
|
$
|
973
|
|
June 30, 2022
|
$
|
1,045
|
|
June 30, 2023
|
$
|
1,093
|
|
June 30, 2024 to June 30, 2028
|
$
|
6,374
|
|
|
|
Expected Contributions:
|
|
June 30, 2019
|
$
|
827
|
|
Sensitivity in
Fiscal 2019
Results
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one percentage point change in assumed health care cost trend rates would have the following effects in fiscal 2019:
|
|
|
|
|
|
|
|
|
|
|
|
1-Percentage Point
|
(In thousands)
|
|
Increase
|
|
Decrease
|
Effect on total of service and interest cost components
|
|
$
|
65
|
|
|
$
|
(57
|
)
|
Effect on accumulated postretirement benefit obligation
|
|
$
|
761
|
|
|
$
|
(719
|
)
|
Note 16. Bank Loan
The Company maintains a
$125.0 million
senior secured revolving credit facility (the “Revolving Facility”) with JPMorgan Chase Bank, N.A. and SunTrust Bank (collectively, the “Lenders”), with a sublimit on letters of credit and swingline loans of
$30.0 million
and
$15.0 million
, respectively. The Revolving Facility includes an accordion feature whereby the Company may increase the Revolving Commitment by up to an additional
$50.0 million
, subject to certain conditions. Advances are based on the Company’s eligible accounts receivable, eligible inventory, and the value of certain real property and trademarks, less required reserves. The commitment fee is a flat fee of
0.25%
per annum irrespective of average revolver usage. Outstanding obligations are collateralized by all of the Company’s assets, excluding certain real property not included in the borrowing base and machinery and equipment (other than inventory). Borrowings under the Revolving Facility bear interest based on average historical excess availability levels with a range of
PRIME - 0.25%
to
PRIME + 0.50%
or
Adjusted LIBO Rate + 1.25%
to
Adjusted LIBO Rate + 2.00%
. The Company is subject to a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including financial covenants relating to the maintenance of a fixed charge coverage ratio in certain circumstances, and the right of the Lenders to establish reserve requirements, which may reduce the amount of credit otherwise available to the Company. The Company is allowed to pay dividends on its capital stock, provided, among other things, certain excess availability requirements are met, and no event of default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
At
June 30, 2018
, the Company was eligible to borrow up to a total of
$117.1 million
under the Revolving Facility and had outstanding borrowings of
$89.8 million
, utilized
$2.0 million
of the letters of credit sublimit, and had excess availability under the Revolving Facility of
$25.3 million
. Fair value of the loan approximates carrying value. At
June 30, 2018
, the weighted average interest rate on the Company's outstanding borrowings under the Revolving Facility was
4.10%
.
On September 10, 2018 (the “Second Amendment Effective Date”), the Company entered into a second amendment to the Revolving Facility to amend certain definitions that affect the fixed charge coverage ratio covenant test and add a covenant limiting the Company’s incurrence of capital expenditures during the fiscal year ending June 30, 2019. The effect of the foregoing amendments is that the Company was in compliance with the fixed charge coverage ratio covenant and no event of default has occurred or existed through the Second Amendment Effective Date.
Note 17. 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 is scheduled to mature in December 2018. The loan is 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
, which is updated on a quarterly basis.
|
|
|
|
|
|
|
|
|
|
As of and for the Years Ended June 30,
|
|
|
2018
|
|
2017
|
|
2016
|
Loan amount (in thousands)
|
|
$2,145
|
|
$4,289
|
|
$6,434
|
Shares are held by the plan trustee for allocation among participants as the loan is repaid. The unencumbered shares are allocated to participants using a compensation-based formula. Subject to vesting requirements, allocated shares are owned by participants and shares are held by the plan trustee until the participant retires.
Historically, the Company used the dividends, if any, on ESOP shares to pay down the loans, and allocated to the ESOP participants shares equivalent to the fair market value of the dividends they would have received. No dividends were paid in fiscal 2018, 2017 or 2016.
During the fiscal years ended June 30, 2018, 2017 and 2016, the Company charged
$2.3 million
,
$2.5 million
and
$3.4 million
, respectively, to compensation expense related to the ESOP. The decrease in ESOP expense in fiscal 2018 and 2017 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
$0.1 million
,
$0.5 million
and
$36,000
for the fiscal years ended June 30, 2018, 2017 and 2016, respectively, is recorded as additional paid-in capital.
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
|
2018
|
|
2017
|
Allocated shares
|
|
1,502,323
|
|
|
1,717,608
|
|
Committed to be released shares
|
|
73,826
|
|
|
74,983
|
|
Unallocated shares
|
|
72,114
|
|
|
145,941
|
|
Total ESOP shares
|
|
1,648,263
|
|
|
1,938,532
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fair value of ESOP shares
|
|
$
|
50,354
|
|
|
$
|
58,641
|
|
Note 18. 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.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
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 June 30, 2018, there were
956,830
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 includes annual limits on certain awards that may be granted to any individual participant. The maximum aggregate number of shares of common stock with respect to all stock options and stock appreciation rights that may be granted to any one person during any calendar year is
250,000
shares. The 2017 Plan also includes limits on the maximum aggregate amount that may become payable pursuant to all performance bonus awards that may be granted to any one person during any calendar year and the maximum amount that may become payable pursuant to all cash-based awards granted under the 2017 Plan and the aggregate grant date fair value of all equity-based awards granted under the 2017 Plan to any non-employee director during any calendar year for services as a member of the Board.
The 2017 Plan contains a minimum vesting requirement, subject to limited exceptions, that awards made under the 2017 Plan may not vest earlier than the date that is one year following the grant date of the award. The 2017 Plan also contains provisions with respect to payment of exercise or purchase prices, vesting and expiration of awards, adjustments and treatment of awards upon certain corporate transactions, including stock splits, recapitalizations and mergers, transferability of awards and tax withholding requirements.
The 2017 Plan may be amended or terminated by the Board at any time, subject to certain limitations requiring stockholder consent or the consent of the applicable participant. In addition, the administrator may not, without the approval of the Company’s stockholders, authorize certain re-pricings of any outstanding stock options or stock appreciation rights granted under the 2017 Plan. The 2017 Plan will expire on June 20, 2027.
As of June 30, 2018, awards covering
174,802
shares of common stock have been granted under the 2017 Plan.
Non-qualified stock options with time-based vesting (“NQOs”)
In fiscal 2018, the Company granted
124,278
shares issuable upon the exercise of NQOs to eligible employees under the 2017 Plan. These NQOs have an exercise price of
$31.70
per share, which was the closing price of the Company’s common stock as reported on the NASDAQ Global Select Market on the date of grant. One-third of the total number of shares subject to each such stock option vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.
In fiscal 2017, the Company granted no shares issuable upon the exercise of NQOs. In fiscal 2016, the Company granted
21,595
shares issuable upon the exercise of NQOs with a weighted average exercise price of
$29.48
per share to eligible employees under the Amended Equity Plan which vest ratably over a
3
-year period.
Following are the assumptions used in the Black-Scholes valuation model for NQOs granted during the fiscal years ended June 30, 2018 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
2018
|
|
2016
|
Weighted average fair value of NQOs
|
|
$
|
10.41
|
|
|
$
|
12.63
|
|
Risk-free interest rate
|
|
2.0
|
%
|
|
1.6
|
%
|
Dividend yield
|
|
—
|
%
|
|
—
|
%
|
Average expected term
|
|
4.6 years
|
|
|
5.1 years
|
|
Expected stock price volatility
|
|
35.4
|
%
|
|
47.1
|
%
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The Company’s assumption regarding expected stock price volatility is based on the historical volatility of the Company’s stock price. The risk-free interest rate is based on U.S. Treasury zero-coupon issues at the date of grant with a remaining term equal to the expected life of the stock options. The average expected term is based on historical weighted time outstanding and the expected weighted time outstanding calculated by assuming the settlement of outstanding awards at the midpoint between the vesting date and the end of the contractual term of the award. Currently, management estimates an annual forfeiture rate of
4.8%
based on actual forfeiture experience. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The following table summarizes NQO activity for the three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding NQOs:
|
|
Number
of NQOs
|
|
Weighted
Average
Exercise
Price ($)
|
|
Weighted
Average
Grant Date
Fair Value ($)
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
Aggregate
Intrinsic
Value
($ in thousands)
|
Outstanding at June 30, 2015
|
|
329,300
|
|
|
12.30
|
|
5.54
|
|
3.9
|
|
3,700
|
|
Granted
|
|
21,595
|
|
|
29.48
|
|
12.63
|
|
6.4
|
|
—
|
|
Exercised
|
|
(112,895
|
)
|
|
12.35
|
|
5.37
|
|
—
|
|
1,853
|
|
Cancelled/Forfeited
|
|
(18,371
|
)
|
|
13.45
|
|
6.17
|
|
—
|
|
—
|
|
Outstanding at June 30, 2016
|
|
219,629
|
|
|
13.87
|
|
6.28
|
|
3.7
|
|
3,995
|
|
Granted
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
Exercised(1)
|
|
(67,482
|
)
|
|
12.38
|
|
5.57
|
|
—
|
|
1,407
|
|
Cancelled/Forfeited
|
|
(18,683
|
)
|
|
25.13
|
|
10.90
|
|
—
|
|
—
|
|
Outstanding at June 30, 2017
|
|
133,464
|
|
|
13.05
|
|
5.99
|
|
2.6
|
|
2,299
|
|
Granted
|
|
124,278
|
|
|
31.70
|
|
10.41
|
|
6.1
|
|
—
|
|
Exercised
|
|
(86,160
|
)
|
|
12.32
|
|
5.71
|
|
—
|
|
1,654
|
|
Cancelled/Forfeited
|
|
(10,258
|
)
|
|
28.52
|
|
10.72
|
|
—
|
|
—
|
|
Outstanding at June 30, 2018
|
|
161,324
|
|
|
26.82
|
|
9.24
|
|
5.1
|
|
741
|
|
Vested and exercisable at June 30, 2018
|
|
41,163
|
|
|
12.59
|
|
5.79
|
|
1.5
|
|
741
|
|
Vested and expected to vest at June 30, 2018
|
|
153,562
|
|
|
26.58
|
|
9.18
|
|
5.1
|
|
741
|
|
___________
(1) Includes
11,147
shares that were withheld to cover option cost and meet the employees' minimum statutory tax withholding and retired.
The aggregate intrinsic values outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic value, based on the Company’s closing stock price of
$30.55
at June 29, 2018,
$30.25
at June 30, 2017 and
$32.06
at June 30, 2016 , representing the last trading day of the respective fiscal years, which would have been received by NQO holders had all award holders exercised their NQOs that were in-the-money as of those dates. The aggregate intrinsic value of NQO exercises in each fiscal period above represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. NQOs outstanding that are expected to vest are net of estimated forfeitures.
Total fair value of NQOs vested during fiscal 2018, 2017, and 2016 was
$24,000
,
$0.2 million
and
$0.3 million
, respectively. The Company received
$1.1 million
,
$0.5 million
and
$1.4 million
in proceeds from exercises of vested NQOs in fiscal 2018, 2017 and 2016, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table summarizes nonvested NQO activity for the three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
Nonvested NQOs:
|
|
Number
of
NQOs
|
|
Weighted
Average
Exercise
Price ($)
|
|
Weighted
Average
Grant Date
Fair Value ($)
|
|
Weighted
Average
Remaining
Life (Years)
|
Outstanding at June 30, 2015
|
|
80,195
|
|
|
15.94
|
|
7.21
|
|
5.2
|
Granted
|
|
21,595
|
|
|
29.48
|
|
12.63
|
|
6.4
|
Vested
|
|
(47,418
|
)
|
|
14.05
|
|
6.44
|
|
—
|
Forfeited
|
|
(15,641
|
)
|
|
12.95
|
|
6.09
|
|
—
|
Outstanding at June 30, 2016
|
|
38,731
|
|
|
27.02
|
|
11.63
|
|
6.1
|
Vested
|
|
(15,765
|
)
|
|
26.45
|
|
11.41
|
|
—
|
Forfeited
|
|
(14,878
|
)
|
|
27.44
|
|
11.96
|
|
—
|
Outstanding at June 30, 2017
|
|
8,088
|
|
|
27.33
|
|
11.47
|
|
5.3
|
Granted
|
|
124,278
|
|
|
31.70
|
|
10.41
|
|
6.1
|
Vested
|
|
(1,947
|
)
|
|
31.70
|
|
10.41
|
|
—
|
Forfeited
|
|
(10,258
|
)
|
|
30.47
|
|
12.40
|
|
—
|
Outstanding at June 30, 2018
|
|
120,161
|
|
|
31.70
|
|
10.43
|
|
6.4
|
As of June 30, 2018 and 2017, respectively, there was
$1.0 million
and
$80,000
of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at June 30, 2018 is expected to be recognized over the weighted average period of
2.4
years. Total compensation expense for NQOs was
$0.3 million
,
$0.1 million
and
$0.2 million
in fiscal 2018, 2017 and 2016, respectively.
Non-qualified stock options with performance-based and time-based vesting (
“
PNQs”)
In fiscal 2018, the Company granted no shares issuable upon the exercise of PNQs.
In fiscal 2017, the Company granted
149,223
shares issuable upon the exercise of PNQs to eligible employees under the Amended Equity Plan, with 20% of each such grant subject to forfeiture if a target modified net income goal for fiscal 2017 (“Fiscal 2017 Target”) is not attained. For this purpose, “Modified Net Income” is defined as net income (GAAP) before taxes and excluding any gains or losses from sales of assets, and excluding the effect of restructuring and other transition expenses related to the relocation of the Company’s corporate headquarters to Northlake, Texas. These PNQs have an exercise price of
$32.85
per share which was the closing price of the Company’s common stock as reported on the NASDAQ Global Select Market on the date of grant. One-third of the total number of shares subject to each such stock option vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.
In fiscal 2016, the Company granted
143,466
shares issuable upon the exercise of PNQs with an exercise price of
$29.48
per share to eligible employees under the Amended Equity Plan. With the exception of a portion of the award to the Company’s President and Chief Executive Officer as described below, these PNQs vest over a three-year period with one-third of the total number of shares subject to each such PNQ becoming exercisable each year on the anniversary of the grant date, based on the Company’s achievement of modified net income targets for fiscal 2016 (“Fiscal 2016 Target“) as approved by the Compensation Committee, subject to the participant’s employment by the Company or service on the Board of Directors of the Company on the applicable vesting date and the acceleration provisions contained in the Amended Equity Plan and the applicable award agreement. But if actual modified net income for fiscal 2016 is less than the Fiscal 2016 Target, then only
80%
of the total shares issuable under such grant will vest subject to continued employment with the Company on the relevant vesting dates.
On June 3, 2016, the Compensation Committee of the Board of Directors of the Company determined that a portion of the performance non-qualified stock option granted to Michael H. Keown, the Company's President and Chief Executive Officer, on December 3, 2015 (the “Original Option”) was invalid because such portion caused the total number of option shares granted to Mr. Keown in calendar year 2015 to exceed the limit of
75,000
shares that may be granted to a participant in a single calendar year under the Amended Equity Plan by
22,862
shares. Therefore, the Compensation Committee reduced the total number of shares of common stock issuable under the Original Option by
22,862
shares. The reduction of the
22,862
excess
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
option shares brought the total number of option shares granted to Mr. Keown in calendar 2015 within the limitation of the Amended Equity Plan.
In addition, on June 3, 2016, the Compensation Committee, in accordance with the provisions of the Amended Equity Plan, granted Mr. Keown a performance non-qualified stock option to purchase
22,862
shares of the Company's common stock (the “New Option”) with an exercise price of
$29.48
per share, which was the greater of the exercise price of the Original Option and the closing price of the Company's common stock as reported on the NASDAQ Global Select Market on June 3, 2016, the date of grant. The New Option is subject to the same terms and conditions of the Original Option including an expiration date of December 3, 2022, and the three-year vesting schedule, except that to comply with the Amended Equity Plan's minimum vesting schedule of one year from the grant date, one-third of shares issuable under the New Option will vest on June 3, 2017, and the remainder of the New Option shares will vest one-third each on the second and third anniversaries of the grant date of the Original Option, based on the Company’s achievement of the same performance goals as the Original Option, subject to Mr. Keown’s continued employment on the applicable vesting date.
Following are the assumptions used in the Black-Scholes valuation model for PNQs granted during the fiscal years ended June 30, 2017 and 2016:
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
2017
|
|
2016
|
Weighted average fair value of PNQs
|
|
$
|
11.42
|
|
|
$
|
11.38
|
|
Risk-free interest rate
|
|
1.5
|
%
|
|
1.6
|
%
|
Dividend yield
|
|
—
|
%
|
|
—
|
%
|
Average expected term
|
|
4.9 years
|
|
|
4.9 years
|
|
Expected stock price volatility
|
|
37.7
|
%
|
|
42.5
|
%
|
The following table summarizes PNQ activity for the three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding PNQs:
|
|
Number
of
PNQs
|
|
Weighted
Average
Exercise
Price ($)
|
|
Weighted
Average
Grant Date
Fair Value ($)
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
Aggregate
Intrinsic
Value
($ in
thousands)
|
Outstanding at June 30, 2015
|
|
224,067
|
|
|
22.44
|
|
10.31
|
|
6.0
|
|
237
|
|
Granted
|
|
143,466
|
|
|
29.48
|
|
11.38
|
|
6.2
|
|
—
|
|
Exercised
|
|
(14,144
|
)
|
|
21.20
|
|
10.45
|
|
—
|
|
107
|
|
Cancelled/Forfeited
|
|
(64,790
|
)
|
|
23.20
|
|
10.37
|
|
—
|
|
—
|
|
Outstanding at June 30, 2016
|
|
288,599
|
|
|
25.83
|
|
10.82
|
|
5.7
|
|
1,798
|
|
Granted
|
|
149,223
|
|
|
32.85
|
|
11.42
|
|
4.6
|
|
—
|
|
Exercised(1)
|
|
(15,321
|
)
|
|
26.26
|
|
10.98
|
|
—
|
|
109
|
|
Cancelled/Forfeited
|
|
(63,715
|
)
|
|
31.39
|
|
11.39
|
|
—
|
|
—
|
|
Outstanding at June 30, 2017
|
|
358,786
|
|
|
27.75
|
|
10.96
|
|
5.2
|
|
1,181
|
|
Exercised
|
|
(10,342
|
)
|
|
27.13
|
|
11.02
|
|
—
|
|
61
|
|
Cancelled/Forfeited
|
|
(47,736
|
)
|
|
32.06
|
|
11.43
|
|
—
|
|
—
|
|
Outstanding at June 30, 2018
|
|
300,708
|
|
|
27.08
|
|
10.89
|
|
4.0
|
|
1,207
|
|
Vested and exercisable at June 30, 2018
|
|
223,318
|
|
|
25.54
|
|
10.72
|
|
3.7
|
|
1,174
|
|
Vested and expected to vest at June 30, 2018
|
|
298,120
|
|
|
27.04
|
|
10.88
|
|
4.0
|
|
1,206
|
|
___________
(1) Includes
6,326
shares that were withheld to cover option cost and meet the employees' minimum statutory tax withholding and retired.
The aggregate intrinsic values outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of
$30.55
at June 29, 2018,
$30.25
at June 30, 2017 and
$32.06
at June 30, 2016, representing the last trading day of the respective fiscal years, which would have been received by PNQ holders
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
had all award holders exercised their PNQs that were in-the-money as of those dates. The aggregate intrinsic value of PNQ exercises in each fiscal period represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. PNQs outstanding that are expected to vest are net of estimated forfeitures.
Total fair value of PNQs vested during the fiscal years ended June 30, 2018, 2017 and 2016 was
$0.9 million
,
$1.3 million
and
$0.3 million
, respectively. The Company received
$0.3 million
,
$0.2 million
and
$0.3 million
in proceeds from exercises of vested PNQs in fiscal 2018, 2017 and 2016, respectively.
As of June 30, 2018, the Company met the performance targets for the fiscal 2016 PNQ awards and the fiscal 2015 PNQ awards. In fiscal 2018, based on the Company's failure to achieve certain financial objectives over the applicable performance period, a total of
18,708
shares subject to fiscal 2017 PNQ awards were forfeited, representing
20%
of the shares subject to each such award. Subject to certain continued employment conditions and subject to accelerated vesting in certain circumstances, one half of the remaining PNQs subject to the fiscal 2017 PNQ awards are scheduled to vest on each of the second and third anniversaries of the grant date. The Company expects to meet the performance targets for the remainder of the fiscal 2017 PNQ awards.
The following table summarizes nonvested PNQ activity for the three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
Nonvested PNQs:
|
|
Number
of
PNQs
|
|
Weighted
Average
Exercise
Price ($)
|
|
Weighted
Average
Grant Date
Fair Value ($)
|
|
Weighted
Average
Remaining
Life (Years)
|
Outstanding at June 30, 2015
|
|
189,108
|
|
|
22.66
|
|
10.28
|
|
6.2
|
Granted
|
|
143,466
|
|
|
29.48
|
|
11.38
|
|
6.2
|
Vested
|
|
(27,317
|
)
|
|
10.16
|
|
23.44
|
|
—
|
Forfeited
|
|
(64,790
|
)
|
|
23.20
|
|
10.37
|
|
—
|
Outstanding at June 30, 2016
|
|
240,467
|
|
|
26.49
|
|
10.92
|
|
5.9
|
Granted
|
|
149,223
|
|
|
32.85
|
|
11.42
|
|
4.6
|
Vested
|
|
(119,403
|
)
|
|
24.91
|
|
10.75
|
|
—
|
Forfeited
|
|
(62,262
|
)
|
|
31.39
|
|
11.39
|
|
—
|
Outstanding at June 30, 2017
|
|
208,025
|
|
|
30.48
|
|
11.24
|
|
5.8
|
Vested
|
|
(82,899
|
)
|
|
29
|
|
10.99
|
|
—
|
Forfeited
|
|
(47,736
|
)
|
|
32
|
|
11.43
|
|
—
|
Outstanding at June 30, 2018
|
|
77,390
|
|
|
31.53
|
|
11.39
|
|
5.0
|
As of June 30, 2018 and 2017, there was
$0.5 million
and
$1.8 million
, respectively, of unrecognized compensation cost related to PNQs. The unrecognized compensation cost related to PNQs at June 30, 2018 is expected to be recognized over the weighted average period of
0.9
years. Total compensation expense related to PNQs in fiscal 2018, 2017 and 2016 was
$0.8 million
,
$1.1 million
and
$0.5 million
, respectively.
Restricted Stock
During fiscal 2018, the Company granted
13,110
shares of restricted stock under the 2017 Plan with a weighted average grant date fair value of
$33.88
per share, to eligible employees and directors. The fiscal 2018 restricted stock awards cliff vest on the earlier of the one year anniversary of the grant date or the date of the first annual meeting of the Company’s stockholders immediately following the grant date, in the case of non-employee directors, and the third anniversary of the grant date, in the case of eligible employees, in each case subject to continued service to the Company through the vesting date and the acceleration provisions of the 2017 Plan and restricted stock agreement.
During fiscal 2017 and 2016, the Company granted
5,106
shares and
10,170
shares of restricted stock under the Amended Equity Plan, respectively, with a weighted average grant date fair value of
$35.25
and
$29.99
per share, respectively, to eligible employees and directors. Shares of restricted stock generally vest at the end of three years for eligible employees. Unlike prior-year awards to non-employee directors, which vest ratably over a period of three years, the fiscal 2017 restricted stock awards to non-employee directors cliff vest on the first anniversary of the date of grant subject to continued service to the Company through the vesting date and the acceleration provisions of the Amended Equity Plan and restricted stock agreement.
During fiscal 2018,
9,642
shares of restricted stock vested.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table summarizes restricted stock activity for the three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Nonvested Restricted Stock Awards:
|
|
Shares
Awarded
|
|
Weighted
Average
Grant Date
Fair Value
($)
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
Aggregate
Intrinsic
Value
($ in thousands)
|
Outstanding at June 30, 2015
|
|
47,082
|
|
|
16.48
|
|
1.2
|
|
1,106
|
|
Granted
|
|
10,170
|
|
|
29.99
|
|
—
|
|
305
|
|
Exercised/Released(1)
|
|
(24,841
|
)
|
|
14.08
|
|
—
|
|
747
|
|
Cancelled/Forfeited
|
|
(8,619
|
)
|
|
13.06
|
|
—
|
|
—
|
|
Outstanding at June 30, 2016
|
|
23,792
|
|
|
26.00
|
|
1.8
|
|
763
|
|
Granted
|
|
5,106
|
|
|
35.25
|
|
—
|
|
180
|
|
Exercised/Released
|
|
(7,458
|
)
|
|
24.16
|
|
—
|
|
253
|
|
Cancelled/Forfeited
|
|
(5,995
|
)
|
|
26.41
|
|
—
|
|
—
|
|
Outstanding at June 30, 2017
|
|
15,445
|
|
|
29.79
|
|
0.9
|
|
467
|
|
Granted
|
|
13,110
|
|
|
33.88
|
|
—
|
|
444
|
|
Exercised/Released
|
|
(9.642
|
)
|
|
31.12
|
|
—
|
|
323
|
|
Cancelled/Forfeited
|
|
(3.955
|
)
|
|
26.13
|
|
—
|
|
—
|
|
Outstanding at June 30, 2018
|
|
14,958
|
|
|
33.48
|
|
1.7
|
|
457
|
|
Expected to vest at June 30, 2018
|
|
14,493
|
|
|
33.50
|
|
1.7
|
|
443
|
|
__________
(1) Includes
5,177
shares that were withheld to meet the employees' minimum statutory tax withholding and retired.
The aggregate intrinsic value of shares outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of
$30.55
at June 29, 2018,
$30.25
at June 30, 2017 and
$32.06
at June 30, 2016, representing the last trading day of the respective fiscal years. Restricted stock that is expected to vest is net of estimated forfeitures.
As of each of June 30, 2018 and 2017, there was
$0.3 million
of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at June 30, 2018 is expected to be recognized over the weighted average period of
0.8
years. Total compensation expense for restricted stock was
$0.3 million
,
$0.2 million
and
$0.2 million
, for the fiscal years ended June 30, 2018, 2017 and 2016, respectively.
Performance-Based Restricted Stock Units (“PBRSUs”)
During fiscal 2018, the Company granted
37,414
PBRSUs under the 2017 Plan to eligible employees with a grant date fair value of
$31.70
per unit. The fiscal 2018 PBRSU awards cliff vest on the third anniversary of the date of grant based on the Company’s achievement of certain financial performance goals for the performance period July 1, 2017 through June 30, 2020, subject to certain continued employment conditions and subject to acceleration provisions of the 2017 Plan and restricted stock unit agreement. At the end of the
three
-year performance period, the number of PBRSUs that actually vest will be
0%
to
150%
of the target amount, depending on the extent to which the Company meets or exceeds the achievement of those financial performance goals measured over the full three-year performance period.
No
PBRSUs were granted during fiscal 2017 and fiscal 2016.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
The following table summarizes PBRSU activity for the most recent fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and Nonvested PBRSUs:
|
|
PBRSUs
Awarded
|
|
Weighted
Average
Grant Date
Fair Value
($)
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
Aggregate
Intrinsic
Value
($ in thousands)
|
Outstanding and nonvested at June 30, 2017
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
Granted(1)
|
|
37,414
|
|
|
31.70
|
|
—
|
|
1,186
|
|
Vested/Released
|
|
—
|
|
|
—
|
|
—
|
|
—
|
|
Cancelled/Forfeited
|
|
(1,682
|
)
|
|
31.70
|
|
—
|
|
—
|
|
Outstanding and nonvested at June 30, 2018
|
|
35,732
|
|
|
31.70
|
|
3.4
|
|
1,092
|
|
Expected to vest at June 30, 2018
|
|
31,800
|
|
|
31.70
|
|
3.4
|
|
971
|
|
_____________
(1) The target number of PBRSUs is presented in the table. Under the terms of the awards, the recipient may earn between
0%
and
150%
of the target number of PBRSUs depending on the extent to which the Company meets or exceeds the achievement of the applicable financial performance goals.
The aggregate intrinsic value of PBRSUs outstanding at June 30, 2018 represents the total pretax intrinsic value, based on the Company’s closing stock price of
$30.55
at June 29, 2018, representing the last trading day of the fiscal year. PBRSUs that are expected to vest are net of estimated forfeitures.
As of June 30, 2018 and 2017, there was
$0.9 million
and
$0
, respectively, of unrecognized compensation cost related to PBRSUs. The unrecognized compensation cost related to PBRSUs at June 30, 2018 is expected to be recognized over the weighted average period of
2.4
years. Total compensation expense for PBRSUs was
$0.2 million
,
$0
and
$0
for the fiscal years ended June 30, 2018, 2017 and 2016, respectively.
Note 19. Other Current Liabilities
Other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
Accrued postretirement benefits
|
|
$
|
810
|
|
|
$
|
893
|
|
Accrued workers’ compensation liabilities
|
|
1,698
|
|
|
1,885
|
|
Short-term pension liabilities
|
|
3,761
|
|
|
3,956
|
|
Earnout payable(1)
|
|
600
|
|
|
100
|
|
Other (including net taxes payable)(2)
|
|
3,790
|
|
|
2,868
|
|
Other current liabilities
|
|
$
|
10,659
|
|
|
$
|
9,702
|
|
___________
(1) Includes in fiscal 2018,
$0.6 million
in estimated fair value of earnout payable in connection with the Company’s acquisition of substantially all of the assets of West Coast Coffee completed on February 7, 2017 (see
Note 4
). Includes in fiscal 2017,
$0.1 million
in earnout payable in connection with the Company’s acquisition of substantially all of the assets of Rae' Launo Corporation.
(2) Includes in fiscal 2018
$0.1 million
in cumulative preferred dividends, undeclared and unpaid.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Note 20. Other Long-Term Liabilities
Other long-term liabilities include the following:
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
Earnout payable(1)
|
|
$
|
—
|
|
|
$
|
1,100
|
|
Long-term obligations under capital leases
|
|
58
|
|
|
237
|
|
Derivative liabilities—noncurrent
|
|
386
|
|
|
380
|
|
Multiemployer Plan Holdback—Boyd Coffee
|
|
1,056
|
|
|
—
|
|
Cumulative preferred dividends, undeclared and unpaid—noncurrent
|
|
312
|
|
|
—
|
|
Other long-term liabilities
|
|
$
|
1,812
|
|
|
$
|
1,717
|
|
___________
(1) At June 30, 2017, includes
$0.5 million
and
$0.6 million
in earnout payable in connection with the Company’s acquisition of substantially all of the assets of China Mist completed on October 11, 2016 and the Company’s acquisition of substantially all of the assets of West Coast Coffee completed on February 7, 2017, respectively. In fiscal 2018, the Company recorded a change in the estimated fair value of the China Mist contingent earnout consideration of
$(0.5) million
as the Company does not expect the contingent sales levels to be reached. The West Coast Coffee earnout is estimated to be paid within twelve months and is included in other current liabilities on the Company’s consolidated balance sheet at June 30, 2018. See
Note 4
and
Note 19
.
Note 21. Income Taxes
The current and deferred components of the provision for income taxes consist of the following (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
):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
101
|
|
|
$
|
132
|
|
|
$
|
214
|
|
State
|
|
56
|
|
|
340
|
|
|
103
|
|
Total current income tax expense
|
|
157
|
|
|
472
|
|
|
317
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
17,090
|
|
|
12,120
|
|
|
(60,069
|
)
|
State
|
|
65
|
|
|
2,223
|
|
|
(12,487
|
)
|
Total deferred income tax expense (benefit)
|
|
17,155
|
|
|
14,343
|
|
|
(72,556
|
)
|
Income tax expense (benefit)
|
|
$
|
17,312
|
|
|
$
|
14,815
|
|
|
$
|
(72,239
|
)
|
A reconciliation of income tax expense (benefit) to the federal statutory tax rate is as follows (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
):
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
Statutory tax rate
|
|
28
|
%
|
|
35
|
%
|
|
35
|
%
|
Income tax expense at statutory rate
|
|
$
|
(272
|
)
|
|
$
|
13,078
|
|
|
$
|
(157
|
)
|
State income tax expense, net of federal tax benefit
|
|
12
|
|
|
1,707
|
|
|
160
|
|
Dividend income exclusion
|
|
—
|
|
|
(134
|
)
|
|
(140
|
)
|
Valuation allowance
|
|
283
|
|
|
(14
|
)
|
|
(71,670
|
)
|
Change in tax rate
|
|
18,022
|
|
|
(54
|
)
|
|
(836
|
)
|
Retiree life insurance
|
|
19
|
|
|
1
|
|
|
135
|
|
Other (net)
|
|
(752
|
)
|
|
231
|
|
|
269
|
|
Income tax expense (benefit)
|
|
$
|
17,312
|
|
|
$
|
14,815
|
|
|
$
|
(72,239
|
)
|
The primary components of the temporary differences which give rise to the Company’s net deferred tax assets (liabilities) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
(In thousands)
|
|
2018
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
|
|
|
Postretirement benefits
|
|
$
|
18,862
|
|
|
$
|
29,813
|
|
|
$
|
33,815
|
|
Accrued liabilities
|
|
4,754
|
|
|
7,885
|
|
|
11,760
|
|
Net operating loss carryforwards
|
|
32,552
|
|
|
38,981
|
|
|
38,196
|
|
Other
|
|
6,728
|
|
|
6,824
|
|
|
6,952
|
|
Total deferred tax assets
|
|
62,896
|
|
|
83,503
|
|
|
90,723
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Unrealized gain on investments
|
|
—
|
|
|
—
|
|
|
(609
|
)
|
Fixed assets
|
|
(16,156
|
)
|
|
(17,096
|
)
|
|
(5,370
|
)
|
Other
|
|
(5,536
|
)
|
|
(10,861
|
)
|
|
(11,609
|
)
|
Total deferred tax liabilities
|
|
(21,692
|
)
|
|
(27,957
|
)
|
|
(17,588
|
)
|
Valuation allowance
|
|
(1,896
|
)
|
|
(1,613
|
)
|
|
(1,627
|
)
|
Net deferred tax assets (liabilities)
|
|
$
|
39,308
|
|
|
$
|
53,933
|
|
|
$
|
71,508
|
|
At June 30, 2018, the Company had approximately
$124.9 million
in federal and
$103.1 million
in state net operating loss carryforwards that will begin to expire in the years ending June 30, 2030 and June 30, 2018, respectively. Additionally, at June 30, 2018, the Company had
$0.8 million
of federal business tax credits that begin to expire in June 30, 2025 and approximately
$1.8 million
of federal alternative minimum tax credits that do not expire.
Under previous accounting rules related to share-based compensation, the Company recognized windfall tax benefits associated with the exercise of share-based compensation directly to stockholders' equity when realized. Accordingly deferred tax assets were not recognized for net operating loss carryforwards resulting from windfall tax benefits prior to June 30, 2017. As discussed in
Note 2
, the Company adopted ASU 2016-09 beginning on July 1, 2017. Upon adoption, the Company recorded a
$1.6 million
increase to deferred tax assets and a corresponding increase to retained earnings.
At June 30, 2018, the Company had total deferred tax assets of
$62.9 million
and net deferred tax assets before valuation allowance of
$41.2 million
. The Company considered whether a valuation allowance should be recorded against deferred tax assets based on the likelihood that the benefits of the deferred tax assets would or would not ultimately be realized in future periods. In making such assessment, significant weight was given to evidence that could be objectively verified such as recent operating results and less consideration was given to less objective indicators such as future income projections.
After consideration of positive and negative evidence, including the recent history of income, the Company concluded that it is more likely than not that the Company will generate future income sufficient to realize the majority of the
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Company’s deferred tax assets as of June 30, 2018. As of June 30, 2018, the Company cannot conclude that certain state net operating loss carry forwards and tax credit carryovers will be utilized before expiration. Accordingly, the Company will maintain a valuation allowance of
$1.9 million
to offset this deferred tax asset. The valuation allowance increased
$0.3 million
and decreased
$71.7 million
, in fiscal 2018 and 2016, respectively. There was
no
change to the valuation allowance in fiscal 2017.
Total unrecognized tax benefits attributable to uncertain tax positions taken in tax returns in each of fiscal 2018, 2017 and 2016 were
zero
and at June 30, 2018 and 2017, the Company had
no
unrecognized tax benefits.
The Company files income tax returns in the U.S. and in various state jurisdictions with varying statutes of limitations. The Company is no longer subject to U.S. income tax examinations for the fiscal years prior to June 30, 2014. The Internal Revenue Service completed its examination of the Company's tax years ended June 30, 2013 and 2014 and accepted the returns as filed.
The Company’s policy is to recognize interest expense and penalties related to income tax matters as a component of income tax expense. In each of the fiscal years ended June 30, 2018 and 2017, the Company recorded
$0
in accrued interest and penalties associated with uncertain tax positions. Additionally, the Company recorded income of
$0
related to interest and penalties on uncertain tax positions in the fiscal years ended June 30, 2018, 2017 and 2016, respectively.
On December 22, 2017, the President of the United States signed into law the Tax Act. The SEC subsequently issued SAB 118, which provides guidance on accounting for the tax effects of the Tax Act. Under SAB 118, companies are able to record a reasonable estimate of the impacts of the Tax Act if one is able to be determined and report it as a provisional amount during the measurement period. The measurement period is not to extend beyond one year from the enactment date. Impacts of the Tax Act that a company is not able to make a reasonable estimate for should not be recorded until a reasonable estimate can be made during the measurement period.
Pursuant to the Tax Act, the federal corporate tax rate was reduced to 21.0%, effective January 1, 2018. Accordingly, the Company adjusted its federal statutory rate to
28.1%
for the fiscal year ended June 30, 2018. Deferred tax amounts are calculated based on the rates at which they are expected to reverse in the future. The Company is still analyzing certain aspects of the Tax Act and refining its calculations which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. In connection with the initial analysis of the impact of the Tax Act, the Company has recorded a provisional net tax adjustment of
$18.0 million
, related to the reduction in the corporate tax rate. While the Company is able to make a reasonable estimate of the impact of the reduction in corporate rate, it may be affected by other analyses related to the Tax Act, including, but not limited to, changes to IRC section 162(m), which the Company is not yet able to reasonably estimate the effect of this provision of the Tax Act. Therefore, the Company has not made any adjustments related to IRC section 162(m) in its consolidated financial statements. Adjustments will be made to the initial assessment as the Company completes the analysis of the Tax Act, collects and prepares necessary data, and interprets any additional guidance.
Note 22. Net (Loss) Income Per Common Share
Computation of EPS for the year ended June 30, 2018 excludes the dilutive effect of
462,032
shares issuable under stock options,
35,732
PBRSUs and
393,769
shares issuable upon the assumed conversion of the outstanding Series A Preferred Stock because the Company incurred a net loss in fiscal 2018 so their inclusion would be anti-dilutive.
Computation of EPS for the years ended June 30, 2017 and 2016 includes the dilutive effect of
117,007
and
124,879
shares, respectively, issuable under stock options with exercise prices below the closing price of the Company's common stock on the last trading day of the applicable period, but excludes the dilutive effect of
24,671
and
30,931
shares, respectively, issuable under stock options with exercise prices above the closing price of the Company's common stock on the last trading day of the applicable period because their inclusion would be anti-dilutive.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
(In thousands, except share and per share amounts)
|
|
2018
|
|
2017(1)
|
|
2016(1)
|
Undistributed net (loss) income available to common stockholders
|
|
$
|
(18,652
|
)
|
|
$
|
22,524
|
|
|
$
|
71,706
|
|
Undistributed net (loss) income available to nonvested restricted stockholders and holders of convertible preferred stock
|
|
(17
|
)
|
|
27
|
|
|
85
|
|
Net (loss) income available to common stockholders—basic
|
|
$
|
(18,669
|
)
|
|
$
|
22,551
|
|
|
$
|
71,791
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding—basic
|
|
16,815,020
|
|
|
16,668,745
|
|
|
16,502,523
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Shares issuable under stock options
|
|
—
|
|
|
117,007
|
|
|
124,879
|
|
Shares issuable under PBRSUs
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares issuable under convertible preferred stock
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding—diluted
|
|
16,815,020
|
|
|
16,785,752
|
|
|
16,627,402
|
|
Net (loss) income per common share available to common stockholders—basic
|
|
$
|
(1.11
|
)
|
|
$
|
1.35
|
|
|
$
|
4.35
|
|
Net (loss) income per common share available to common stockholders—diluted
|
|
$
|
(1.11
|
)
|
|
$
|
1.34
|
|
|
$
|
4.32
|
|
________________
(1) 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.
Note 23. Preferred Stock
The Company is authorized to issue
500,000
shares of preferred stock at a par value of
$1.00
, including
21,000
authorized shares of Series A Preferred Stock.
Series A Convertible Participating Cumulative Perpetual Preferred Stock
On October 2, 2017, the Company issued
14,700
shares of Series A Preferred Stock in connection with the Boyd Coffee acquisition. The Series A Preferred Stock (a) pays a dividend, when, as and if declared by the Company’s Board of Directors, of
3.5%
APR of the stated value per share, payable quarterly in arrears, (b) has an initial stated value of
$1,000
per share, adjustable up or down by the amount of undeclared and unpaid dividends or subsequent payment of accumulated dividends thereon, respectively, and (c) has a conversion price of
$38.32
. Dividends may be paid in cash. The Company accrues for undeclared and unpaid dividends as they are payable in accordance with the terms of the Certificate of Designations filed with the Secretary of State of the State of Delaware. At June 30, 2018, the Company had undeclared and unpaid preferred dividends of
$389,261
on
14,700
issued and outstanding shares of Series A Preferred Stock. Series A Preferred Stock is a participating security and has rights to earnings that otherwise would have been available to holders of the Company's common stock. On an as converted basis, holders of Series A Preferred Stock are entitled to vote together with the holders of the Company’s common stock and are entitled to share in the dividends on the Company's common stock, when declared. Each share of Series A Preferred Stock is convertible into the number of shares of the Company’s common stock (rounded down to the nearest whole share and subject to adjustment in accordance with the terms of the Certificate of Designations) equal to the stated value per share of Series A Preferred Stock divided by the conversion price of
$38.32
. Series A Preferred Stock is a perpetual stock and is not redeemable at the election of the Company or any holder. Based on its characteristics, the Company classified Series A Preferred Stock as permanent equity.
Series A Preferred Stock is carried on the Company’s consolidated balance sheets at the amount recorded at inception until converted. The Company has the right, exercisable at its election any time on or after October 2, 2018, to convert all but not less than all of the outstanding Series A Preferred Stock if the last reported sale price per share of the Company’s common stock exceeds the conversion price of
$38.32
on each of at least
20
trading days during the
30
consecutive trading days ending on, and including, the trading day immediately prior to the date the Company sends the mandatory conversion notice. The holder may convert
4,200
shares of the Series A Preferred Stock beginning October 2, 2018, an additional
6,300
shares of the Series A Preferred Stock beginning October 2, 2019, and the remaining
10,500
shares of the Series A Preferred
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Stock beginning October 2, 2020. The Series A Preferred Stock (and any underlying shares of the Company’s common stock) are subject to transfer restrictions beginning on October 2, 2017, and ending on, and including, the earlier of (x) the conversion date for a mandatory conversion, (y) the conversion date for an elective conversion in accordance with the Certificate of Designations, and (z) October 2, 2020; provided, that, the holder may transfer to a shareholder of the holder so long as such transfer is not a transfer of value and such shareholder agrees in writing to be bound by the transfer restrictions. Notwithstanding the foregoing, additional transfer restrictions exist until the holder, Boyd Coffee, has terminated its defined benefit plan and all plan assets thereunder have been timely distributed in accordance with all applicable Internal Revenue Service and Pension Benefit Guaranty Corporation requirements.
At June 30, 2018, Series A Preferred Stock consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except share and per share amounts)
|
|
|
|
|
|
|
Shares Authorized
|
|
Shares Issued and Outstanding
|
|
Stated Value per Share
|
|
Carrying Value
|
|
Cumulative Preferred Dividends, Undeclared and Unpaid
|
|
Liquidation Preference
|
21,000
|
|
|
14,700
|
|
|
$
|
1,026
|
|
|
$
|
15,089
|
|
|
$
|
389
|
|
|
$
|
15,089
|
|
Note 24. Commitments and Contingencies
Leases
As part of the China Mist transaction, the Company assumed the lease on China Mist’s existing facility in Scottsdale, Arizona which is terminable upon twelve months’ notice. As part of the West Coast Coffee transaction, the Company entered into a three-year lease on West Coast Coffee’s existing facility in Hillsboro, Oregon, which expires January 31, 2020, and assumed leases on six branch warehouses in Oregon, California and Nevada, expiring on various dates through November 2020. The Company did not assume any leases in connection with the Boyd Coffee acquisition. See
Note 4
.
The Company is also obligated under operating leases for certain branch warehouses, distribution centers and its production facility in Portland, Oregon. Some operating leases have renewal options that allow the Company, as lessee, to extend the leases. Approximately 55% of the Company’s facilities are leased with a variety of expiration dates through 2021. The lease on the Portland facility was renewed in fiscal 2018 and expires in 2028, subject to an option to renew up to an additional 10 years. Rent expenses paid for the fiscal years ended June 30, 2018, 2017 and 2016 were
$5.5 million
,
$5.1 million
and
$4.5 million
, respectively.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Contractual obligations for future fiscal years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual Obligations
|
(In thousands)
|
|
Capital
Lease
Obligations
|
|
Operating
Lease
Obligations
|
|
Expansion Project Contract(1)
|
|
Pension Plan
Obligations(2)
|
|
Postretirement
Benefits Other
Than Pension Plans(3)
|
|
Revolving Credit Facility
|
|
Purchase Commitments (4)
|
|
Other Obligations(5)
|
Year Ended June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
$
|
202
|
|
|
$
|
4,803
|
|
|
$
|
8,520
|
|
|
$
|
13,652
|
|
|
$
|
5,915
|
|
|
$
|
89,787
|
|
|
$
|
78,690
|
|
|
$
|
—
|
|
2020
|
|
$
|
52
|
|
|
$
|
3,069
|
|
|
$
|
—
|
|
|
$
|
8,200
|
|
|
$
|
892
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,754
|
|
2021
|
|
$
|
8
|
|
|
$
|
1,823
|
|
|
$
|
—
|
|
|
$
|
8,440
|
|
|
$
|
973
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
2022
|
|
$
|
—
|
|
|
$
|
1,264
|
|
|
$
|
—
|
|
|
$
|
8,640
|
|
|
$
|
1,045
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
2023
|
|
$
|
—
|
|
|
$
|
1,070
|
|
|
$
|
—
|
|
|
$
|
8,790
|
|
|
$
|
1,093
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Thereafter
|
|
$
|
—
|
|
|
$
|
5,247
|
|
|
$
|
—
|
|
|
$
|
44,410
|
|
|
$
|
6,374
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
$
|
17,276
|
|
|
$
|
8,520
|
|
|
$
|
92,132
|
|
|
$
|
16,292
|
|
|
$
|
89,787
|
|
|
$
|
78,690
|
|
|
$
|
1,754
|
|
Total minimum lease payments
|
|
$
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: imputed interest
(0.82% to 10.66%)
|
|
$
|
(14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of future minimum lease payments
|
|
$
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: current portion
|
|
$
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term capital lease obligations
|
|
$
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
___________
(1) Includes maximum balance due under guaranteed maximum price contract of up to
$19.3 million
in connection with the Expansion Project. See
Note
6.
(2) Includes
$86.7 million
in estimated future benefit payments on single employer pension plan obligations,
$3.8 million
in estimated payments in fiscal 2019 towards settlement of withdrawal liability associated with the Company’s withdrawal from the Local 807 Labor Management Pension Plan and
$1.7 million
in estimated fiscal 2019 contributions to multiemployer pension plans. See
Note 15
.
(3) Includes
$11.2 million
in estimated future benefit payments on postretirement benefit plan obligations and
$5.1 million
in estimated fiscal 2019 contributions to multiemployer plans other than pension plans. See
Note 15
.
(4) Purchase commitments include commitments under coffee purchase contracts for which all delivery terms have been finalized but the related coffee has not been received as of June 30, 2018. Amounts shown in the table above: (a) include all coffee purchase contracts that the Company considers to be from normal purchases; and (b) do not include amounts related to derivative instruments that are recorded at fair value on the Company’s consolidated balance sheets.
(5) Includes
$1.1 million
for Multiemployer Plan Holdback—Boyd Coffee,
$0.4 million
for Derivative liabilities—noncurrent and
$0.3 million
for Cumulative preferred dividends, undeclared and unpaid—noncurrent.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Expansion Project Contract
On February 9, 2018, the Company and Haskell entered into Task Order 6 for the expansion of the Company’s production lines in the New Facility. The maximum price payable by the Company to Haskell under Task Order 6 for all of Haskell’s services, equipment procurement and installation, and construction work in connection with the Expansion Project is
$19.3 million
. In fiscal 2018, the Company paid
$10.7 million
in capital expenditures associated with the Expansion Project, with the balance of up to the guaranteed maximum price of
$19.3 million
expected to be paid in fiscal 2019.
Borrowings Under Revolving Credit Facility
At June 30, 2018, the Company had outstanding borrowings of
$89.8 million
under its Revolving Facility, as compared to outstanding borrowings of
$27.6 million
at June 30, 2017. The increase in outstanding borrowings in fiscal 2018 included
$39.5 million
to fund the cash paid at closing for the purchase of the Boyd Business and the initial Company obligations under the post-closing transition services agreement.
Self-Insurance
At June 30, 2018 the Company had posted
$2.3 million
of cash and a
$2.0 million
letter of credit, and at June 30, 2017 the Company had posted
$3.4 million
in cash, as a security deposit for self-insuring workers’ compensation, general liability and auto insurance coverages.
Non-cancelable Purchase Orders
As of June 30, 2018, the Company had committed to purchase green coffee inventory totaling
$66.0 million
under fixed-price contracts,
$9.0 million
in other inventory under non-cancelable purchase orders and
$3.7 million
in other purchases under non-cancelable purchase orders.
Legal Proceedings
Council for Education and Research on Toxics (“CERT”) v. Brad Berry Company Ltd., et al., Superior Court of the State of California, County of Los Angeles
On August 31, 2012, CERT filed an amendment to a private enforcement action adding a number of companies as defendants, the Company’s subsidiary, Coffee Bean International, Inc., which sell coffee in California under the State of California's Safe Drinking Water and Toxic Enforcement Act of 1986, also known as Proposition 65. The suit alleges that the defendants have failed to issue clear and reasonable warnings in accordance with Proposition 65 that the coffee they produce, distribute, and sell contains acrylamide. This lawsuit was filed in Los Angeles Superior Court (the “Court”). CERT has demanded that the alleged violators remove acrylamide from their coffee or provide Proposition 65 warnings on their products and pay
$2,500
per day for each and every violation while they are in violation of Proposition 65.
Acrylamide is produced naturally in connection with the heating of many foods, especially starchy foods, and is believed to be caused by the Maillard reaction, though it has also been found in unheated foods such as olives. With respect to coffee, acrylamide is produced when coffee beans are heated during the roasting process-it is the roasting itself that produces the acrylamide. While there has been a significant amount of research concerning proposals for treatments and other processes aimed at reducing acrylamide content of different types of foods, to our knowledge there is currently no known strategy for reducing acrylamide in coffee without negatively impacting the sensorial properties of the product.
The Company has joined a Joint Defense Group, or JDG, and, along with the other co-defendants, has answered the complaint, denying, generally, the allegations of the complaint, including the claimed violation of Proposition 65 and further denying CERT’s right to any relief or damages, including the right to require a warning on products. The Joint Defense Group contends that based on proper scientific analysis and proper application of the standards set forth in Proposition 65, exposures to acrylamide from the coffee products pose no significant risk of cancer and, thus, these exposures are exempt from Proposition 65’s warning requirement.
The JDG filed a pleading responding to claims and asserting affirmative defenses on January 22, 2013. The Court initially limited discovery to the four largest defendants, so the Company was not initially required to participate in discovery. The Court decided to handle the trial in two “phases,” and the “no significant risk level” defense, the First
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
Amendment defense, and the federal preemption defense were tried in the first phase. Trial commenced on September 8, 2014, and testimony completed on November 4, 2014, for the three “Phase 1” defenses.
Following final trial briefing, the Court heard, on April 9, 2015, final arguments on the Phase 1 issues. On September 1, 2015, the Court ruled against the JDG on the Phase 1 affirmative defenses. The JDG received permission to file an interlocutory appeal, which was filed by writ petition on October 14, 2015. On January 14, 2016, the Court of Appeals denied the JDG’s writ petition thereby denying the interlocutory appeal so that the case stays with the trial court.
On February 16, 2016, the Plaintiff filed a motion for summary adjudication arguing that based upon facts that had been stipulated by the JDG, the Plaintiff had proven its prima facie case and all that remains is a determination of whether any affirmative defenses are available to Defendants. On March 16, 2016, the Court reinstated the stay on discovery for all parties except for the four largest defendants. Following a hearing on April 20, 2016, the Court granted Plaintiff’s motion for summary adjudication on its prima facie case. Plaintiff filed its motion for summary adjudication of affirmatives defenses on May 16, 2016. At the August 19, 2016 hearing on Plaintiff’s motion for summary adjudication (and the JDG’s opposition), the Court denied Plaintiff’s motion, thus maintaining the ability of the JDG to defend the issues at trial. On October 7, 2016, the Court continued the Plaintiff’s motion for preliminary injunction until the trial for Phase 2.
In November 2016, the parties pursued mediation, but were not able to resolve the dispute.
In December 2016, discovery resumed for all defendants. Depositions of “person most knowledgeable” witnesses for each defendant in the JDG commenced in late December and proceeded through early 2017, followed by new interrogatories served upon the defendants. The Court set a fact and discovery cutoff of May 31, 2017 and an expert discovery cutoff of August 4, 2017. Depositions of expert witnesses were completed by the end of July. On July 6, 2017, the Court held hearings on a number of discovery motions and denied Plaintiff’s motion for sanctions as to all the defendants.
At a final case management conference on August 21, 2017 the Court set August 31, 2017 as the new trial date for Phase 2, though later changed the starting date for trial to September 5, 2017. The Court elected to break up trial for Phase 2 into two segments, the first focused on liability and the second on remedies. After 14 days at trial, both sides rested on the liability segment, and the Court set a date of November 21, 2017 for the hearing for all evidentiary issues related to this liability segment. The Court also set deadlines for evidentiary motions, issues for oral argument, and oppositions to motions. This hearing date was subsequently moved to January 19, 2018.
On March 28, 2018, the Court issued a proposed statement of decision in favor of Plaintiff. Following evaluation of the parties' objections to the proposed statement of decision, the Court issued its final statement of decision on May 7, 2018 which was substantively similar to the proposed statement from March 2018. The issuance of a final statement of decision does not itself cause or order any remedy, such as any requirement to use a warning notice. Any such remedy, including any monetary damages or fee awards, would be resolved in Phase 3 of the trial.
On June 15, 2018, California’s Office of Environmental Health Hazard Assessment (OEHHA) announced its proposal of a regulation that would establish, for the purposes of Proposition 65, that chemicals present in coffee as a result of roasting or brewing pose no significant risk of cancer. If adopted, the regulation would, among other things, mean that Proposition 65 warnings would generally not be required for coffee. Plaintiff had earlier filed a motion for permanent injunction, prior to OEHHA’s announcement, asking that the Court issue an order requiring defendants to provide cancer warnings for coffee or remove the coffee products from store shelves in California. The JDG petitioned the Court to (1) renew and reconsider the JDG’s First Amendment defense from Phase 1 based on a recent U.S. Supreme Court decision in a First Amendment case that was decided in the context of Proposition 65; (2) vacate the July 31, 2018 hearing date and briefing schedule for Plaintiff’s permanent injunction motion; and (3) stay all further proceedings pending the conclusion of the rulemaking process for OEHHA’s proposed regulation. On June 25, 2018, the Court denied the JDG’s motion to vacate the hearing on Plaintiff’s motion for permanent injunction and added the motion to stay to the July 31, 2018 docket to be heard. At the July 31st hearing, the Court granted the JDG’s application and agreed to continue the hearing on all motions to September 6, 2018.
At the September 6, 2018 hearing, the Court denied the JDG’s First Amendment motion, and denied the motion to stay pending conclusion of OEHHA’s rulemaking process. The Plaintiff agreed to have the permanent injunction motion continued until after the remedies phase of the trial. The Court set this “Phase 3” remedies trial phase to begin on October 15, 2018. The Court further required the submission of a joint trial plan by October 3, 2018 and set the date for the final pretrial conference as October 9, 2018.
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
At this time, the Company is not able to predict the probability of the outcome or estimate of loss, if any, related to this matter.
The Company is a party to various other pending legal and administrative proceedings. It is management’s opinion that the outcome of such proceedings will not have a material impact on the Company’s financial position, results of operations, or cash flows.
Note 25. Unusual and Infrequent Expenses
The Company incurred expenses of
$5.2 million
, or
$0.31
per diluted common share, during the fiscal year ended June 30, 2017 which were unusual in nature and infrequent in occurrence. These expenses incurred for successfully defending against the 2016 proxy contest included non-recurring legal fees, financial advisory fees, proxy solicitor fees, mailing and printing costs of proxy solicitation materials and other costs.
Note 26. Selected Quarterly Financial Data (Unaudited)
The following tables set forth certain unaudited quarterly information for each of the eight fiscal quarters in the
two
year period ended
June 30, 2018
. This quarterly information has been prepared on a consistent basis with the audited consolidated financial statements and, in the opinion of management, includes all adjustments which management believes are necessary for a fair presentation of the information for the periods presented. All prior period amounts have been retrospectively adjusted to reflect the impact of the certain changes in accounting principles and corrections to previously issued financial statements as described in
Note 3
.
The Company's quarterly operating results may fluctuate significantly as a result of a variety of factors, and operating results for any fiscal quarter are not necessarily indicative of results for a full fiscal year or future fiscal quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2017
|
|
December 31,
2017
|
|
March 31,
2018
|
|
|
|
|
As Previously Reported
|
|
Retrospectively Adjusted
|
|
As Previously Reported
|
|
Retrospectively Adjusted
|
|
As Previously Reported
|
|
Retrospectively Adjusted
|
|
June 30,
2018
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
131,713
|
|
|
$
|
131,713
|
|
|
$
|
167,366
|
|
|
$
|
167,366
|
|
|
$
|
157,927
|
|
|
$
|
157,927
|
|
|
$
|
149,538
|
|
Cost of goods sold
|
|
$
|
82,706
|
|
|
$
|
85,672
|
|
|
$
|
101,847
|
|
|
$
|
111,175
|
|
|
$
|
99,117
|
|
|
$
|
105,716
|
|
|
$
|
96,939
|
|
Gross profit
|
|
$
|
49,007
|
|
|
$
|
46,041
|
|
|
$
|
65,519
|
|
|
$
|
56,191
|
|
|
$
|
58,810
|
|
|
$
|
52,211
|
|
|
$
|
52,599
|
|
Selling expenses
|
|
$
|
38,915
|
|
|
$
|
32,828
|
|
|
$
|
49,328
|
|
|
$
|
42,414
|
|
|
$
|
44,736
|
|
|
$
|
38,041
|
|
|
$
|
41,256
|
|
(Loss) income from operations
|
|
$
|
(1,258
|
)
|
|
$
|
1,862
|
|
|
$
|
2,442
|
|
|
$
|
28
|
|
|
$
|
(2,864
|
)
|
|
$
|
(2,767
|
)
|
|
$
|
2,001
|
|
Net (loss) income
|
|
$
|
(978
|
)
|
|
$
|
840
|
|
|
$
|
(18,768
|
)
|
|
$
|
(17,060
|
)
|
|
$
|
(3,908
|
)
|
|
$
|
(2,193
|
)
|
|
$
|
133
|
|
Net (loss) income available to common stockholders per common share—basic
|
|
$
|
(0.06
|
)
|
|
$
|
0.05
|
|
|
$
|
(1.13
|
)
|
|
$
|
(1.03
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
—
|
|
Net (loss) income available to common stockholders per common share—diluted
|
|
$
|
(0.06
|
)
|
|
$
|
0.05
|
|
|
$
|
(1.13
|
)
|
|
$
|
(1.03
|
)
|
|
$
|
(0.24
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
—
|
|
Farmer Bros. Co.
Notes to Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2016
|
|
March 31,
2017
|
|
June 30,
2017
|
|
|
As Previously Reported
|
|
Retrospectively Adjusted
|
|
As Previously Reported
|
|
Retrospectively Adjusted
|
|
As Previously Reported
|
|
Retrospectively Adjusted
|
|
As Previously Reported
|
|
Retrospectively Adjusted
|
(In thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
130,488
|
|
|
$
|
130,488
|
|
|
$
|
139,025
|
|
|
$
|
139,025
|
|
|
$
|
138,187
|
|
|
$
|
138,187
|
|
|
$
|
133,800
|
|
|
$
|
133,800
|
|
Cost of goods sold
|
|
$
|
79,290
|
|
|
$
|
85,761
|
|
|
$
|
83,929
|
|
|
$
|
89,531
|
|
|
$
|
84,367
|
|
|
$
|
88,305
|
|
|
$
|
80,182
|
|
|
$
|
91,025
|
|
Gross profit
|
|
$
|
51,198
|
|
|
$
|
44,727
|
|
|
$
|
55,096
|
|
|
$
|
49,494
|
|
|
$
|
53,820
|
|
|
$
|
49,882
|
|
|
$
|
53,618
|
|
|
$
|
42,775
|
|
Selling expenses
|
|
$
|
38,438
|
|
|
$
|
33,303
|
|
|
$
|
39,097
|
|
|
$
|
32,408
|
|
|
$
|
40,377
|
|
|
$
|
34,388
|
|
|
$
|
39,286
|
|
|
$
|
33,230
|
|
Income from operations
|
|
$
|
2,505
|
|
|
$
|
1,168
|
|
|
$
|
35,910
|
|
|
$
|
36,997
|
|
|
$
|
2,058
|
|
|
$
|
4,109
|
|
|
$
|
1,693
|
|
|
$
|
(3,096
|
)
|
Net income (loss)
|
|
$
|
1,618
|
|
|
$
|
814
|
|
|
$
|
20,076
|
|
|
$
|
20,728
|
|
|
$
|
1,594
|
|
|
$
|
2,846
|
|
|
$
|
1,112
|
|
|
$
|
(1,837
|
)
|
Net income (loss) available to common stockholders per common share—basic
|
|
$
|
0.10
|
|
|
$
|
0.05
|
|
|
$
|
1.21
|
|
|
$
|
1.25
|
|
|
$
|
0.10
|
|
|
$
|
0.17
|
|
|
$
|
0.07
|
|
|
$
|
(0.11
|
)
|
Net income (loss) available to common stockholders per common share—diluted
|
|
$
|
0.10
|
|
|
$
|
0.05
|
|
|
$
|
1.20
|
|
|
$
|
1.24
|
|
|
$
|
0.10
|
|
|
$
|
0.17
|
|
|
$
|
0.07
|
|
|
$
|
(0.11
|
)
|
In the second quarter of fiscal 2017, the Company completed the sale of the Torrance Facility, and recognized a net gain from sale in the amount of
$37.4 million
, including non-cash interest expense of
$0.7 million
and non-cash rent expense of
$1.4 million
. See
Note 7
.
|
|
|
Item 9.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|
None.