NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Introduction and Basis of Presentation
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company”), is a national coffee roaster, wholesaler and distributor of coffee, tea, and culinary products.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the interim financial data have been included. Operating results for the three and nine months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2020. Events occurring subsequent to March 31, 2020 have been evaluated for potential recognition or disclosure in the unaudited condensed consolidated financial statements for the three and nine months ended March 31, 2020.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2019, filed with the Securities and Exchange Commission (the “SEC”) on September 11, 2019 (the “2019 Form 10-K”).
Going Concern - The accompanying unaudited condensed consolidated financial statements are prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.
As of March 31, 2020, the Company had $26.4 million of cash on hand and was in compliance with financial covenants under its Amended Revolving Facility. In April 2020, the Company borrowed an additional $42.0 million under its Amended Revolving Facility as a proactive measure to increase its cash position and preserve financial flexibility in light of the current uncertainty in the global markets resulting from the COVID-19 pandemic.
The COVID-19 pandemic and the related restrictive measures such as travel bans, quarantines, shelter-in-place orders, and shutdowns as well as changes in recent consumer behavior, have had an adverse impact on certain of the Company’s Direct-store- delivery (“DSD”) customers, particularly restaurants, hotels, casinos and coffeehouses. Many of these customers have been forced to close or curtail operations, and are purchasing at reduced volumes, if at all. As a result, sales from the Company’s DSD customers have declined between 65% to 70% from pre COVID-19 average sales and there is uncertainty regarding the rate at which these customers will resume operations and purchases as the restrictive measures are lifted. As a result, the Company is projecting potential violations of its financial covenants under the Amended Revolving Facility beginning June 30, 2020, which would place it in an event of default. The occurrence of a default would permit the Company’s lenders to declare as due all amounts outstanding under its Amended Credit Facility which total $122.0 million as of May 7, 2020, and currently mature on November 6, 2023. The Company does not have sufficient cash on hand or available liquidity that can be utilized to repay the total outstanding debt in the event of default. These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern.
In response to these conditions and to maintain operating results and liquidity, the Company has reduced discretionary expenses, aggressively reduced capital expenditures, and closely and proactively managed its inventory purchases, while prioritizing investments in e-commerce initiatives and serving current Direct Ship customers’ needs. Additionally, the Company has continued to focus on the rebalancing of volume across its manufacturing network, bringing additional production into its Northlake, Texas facility to generate additional savings. The Company has already taken the following actions, among others:
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•
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reduced headcount and furloughed a significant percentage of the remaining employees;
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•
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eliminated fiscal third quarter 2020 cash compensation for its Board of Directors;
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•
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temporarily decreased executive leadership, corporate team members’ and all exempt employees’ (except route sales representatives) base salaries by 15%;
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•
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reduced discretionary spending, including a moratorium on all travel;
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•
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reduced fiscal year ending 2020 management incentive bonus program;
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Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
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•
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reduced plant production costs in two of its plants;
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•
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suspended 401(k) cash matching for all eligible employees;
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•
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reduced capital expenditures while also closely managing inventory and other spending;
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•
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implemented cost controls throughout its coffee brewing equipment (“CBE”) program service network;
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•
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instituted cost savings to reduce its selling, general and administrative expenses;
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•
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reduced its DSD supply chain network costs by reducing freight, and fleet, and consolidating routes; and
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•
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commenced negotiations with certain landlords on rent, operating expenses and leases.
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The Company expects these actions will improve its cost structure to mitigate the impact of the COVID-19 pandemic on its operating results and liquidity. In addition, the Company is currently pursuing with its lenders a waiver agreement or forbearance arrangement related to projected covenant violations under its Amended Revolving Facility. The Company obtained an amendment from its lenders in March 2020, and based on the current debt market environment and other factors, management believes that a waiver or forbearance will be approved to avoid acceleration of its debt. As a result, the Company has concluded that management’s plans are probable of being achieved to alleviate substantial doubt about the Company’s ability to continue as a going concern.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries FBC Finance Company, a California corporation, Coffee Bean Holding Co., Inc., a Delaware corporation, the parent company of Coffee Bean International, Inc., an Oregon corporation (“CBI”), China Mist Brands, Inc., a Delaware corporation, Boyd Assets Co., a Delaware corporation, and Coffee Bean International LLC, a Delaware limited liability company. All inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company reviews its estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates and actual results may differ from those estimates.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 2. Summary of Significant Accounting Policies
For a detailed discussion about the Company’s significant accounting policies, see Note 2, “Summary of Significant Accounting Policies,” in the Notes to Consolidated Financial Statements in the 2019 Form 10-K.
During the three and nine months ended March 31, 2020, other than as set forth below and the adoption of Financial Accounting Standards Board Accounting (“FASB”) Standards Update (“ASU”) ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), there were no significant updates made to the Company’s significant accounting policies.
Concentration of Credit Risk
At March 31, 2020 and June 30, 2019, the financial instruments which potentially expose the Company to concentration of credit risk consist of cash in financial institutions (in excess of federally insured limits), derivative instruments and trade receivables.
The Company does not have any credit-risk related contingent features that would require it to post additional collateral in support of its net derivative liability positions. At March 31, 2020 and June 30, 2019, none of the cash in the Company’s coffee-related derivative margin accounts was restricted. Further changes in commodity prices and the number of coffee-related derivative instruments held, could have a significant impact on cash deposit requirements under certain of the Company's broker and counterparty agreements.
Approximately 40% and 28% of the Company’s trade accounts receivable balance was with five customers at March 31, 2020 and June 30, 2019, respectively. The Company estimates its maximum credit risk for accounts receivable at the amount recorded on the balance sheet. The trade accounts receivables are generally short-term and all probable bad debt losses have been appropriately considered in establishing the allowance for doubtful accounts.
Adoption of ASC 842 - Leases
Effective July 1, 2019, the Company adopted the FASB Topic 842 (“ASC 842”), Leases. The Company adopted ASC 842 under the modified retrospective approach using the practical expedient; therefore, the presentation of prior year periods has not been adjusted. No cumulative effect of initially adopting ASC 842 as an adjustment to the opening balance of components of equity as of July 1, 2019 was necessary. The adoption of ASC 842 resulted in the recording of Operating lease right-of-use assets and Operating lease liabilities of $16.3 million, as of July 1, 2019. The adoption of ASC 842 had no impact on retained earnings. See Note 3 for detail discussions on the adoption of ASC 842.
Right-of-use lease assets represent the Company's right to use an underlying asset for the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. The Company uses the implicit rate when readily determinable. Lease terms may include options to extend or terminate the lease when it is reasonably certain that the company will exercise that option. Lease expense is primarily recognized on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are combined for certain assets classes.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Recent Accounting Pronouncements
The Company considers the applicability and impact of all ASUs issued. ASUs not listed below were assessed and either determined to be not applicable or expected to have minimal impact on its condensed consolidated financial statements.
The following table provides a brief description of the applicable recent ASUs issued by the FASB:
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Standard
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Description
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Effective Date
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Effect on the Financial Statements or Other Significant Matters
|
In March 2020, the FASB issued ASU No. 2020-04, “Facilitation of the Effect of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”)
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The London Interbank Offered Rate (LIBOR) is set to expire at the end of 2021. Contracts affected by the rate change would be required to be modified. Under current U.S. GAAP, those modifications would have to be evaluated to determine whether they result in new contracts or continuation of the existing contracts. ASU 2020-04 provides temporary optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the transition from LIBOR to alternative reference rate.
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Issuance date of March 12, 2020 through December 31, 2022.
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The Company is currently evaluating the impact ASU 2020-04 will have on its consolidated financial statements.
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In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” (“ASU 2018-15”).
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ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.
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Annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period.
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Effective for the Company beginning July 1, 2020. The Company is currently evaluating the impact ASU 2018-15 will have on its consolidated financial statements.
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In August 2018, the FASB issued ASU No. 2018-14, “Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans” (“ASU 2018-14”).
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ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing disclosures that no longer are considered cost beneficial, clarifying the specific requirements of disclosures and adding disclosure requirements identified as relevant.
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Annual periods beginning after December 15, 2020. Early adoption is permitted.
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Effective for the Company beginning July 1, 2021. The Company is currently evaluating the impact ASU 2018-14 will have on its consolidated financial statements.
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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”).
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ASU 2018-02 provides entities an option to reclassify certain stranded tax effects resulting from the tax reform from accumulated other comprehensive income to retained earnings.
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The guidance in ASU 2018-02 is effective for annual periods beginning after December 15, 2018, and interim periods within those fiscal years, and should be applied either in the period of adoption or retrospectively.
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The Company did not elect the option to reclassify certain stranded tax effects resulting from the tax reform from accumulated other comprehensive income to retained earnings.
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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”).
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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.
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Annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019.
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The Company adopted the new guidance effective January 1, 2020, on a prospective basis, which did not require the Company to adjust comparative periods. Adoption of ASU 2017-04 did not have a material impact on the results of operations, financial position or cash flows of the Company.
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In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2016-13.
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The objective of the guidance in ASU 2016-13 is to allow entities to recognize estimated credit losses in the period that the change in valuation occurs. The amendments in ASU 2016-13 requires an entity to present financial assets measured on an amortized cost basis on the balance sheet net of an allowance for credit losses. The model requires an estimate of the credit losses expected over the life of an exposure or pool of exposures. The income statement will reflect the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period.
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Annual reporting periods beginning after December 15, 2019 and interim periods within those reporting periods.
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Effective for the Company beginning July 1, 2020. The Company is currently evaluating the impact of adoption on its financial statements and related disclosures, but does not anticipate a material impact to the consolidated financial statements.
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Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
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Standard
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Description
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Effective Date
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Effect on the Financial Statements or Other Significant Matters
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In February 2016, the FASB issued ASU 2016-02, Leases. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2016-02.
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ASU 2016-02 requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases. Subsequent guidance issued after February 2016 did not change the core principle of ASU 2016-02.
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Annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early application is permitted.
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The Company adopted the new guidance effective July 1, 2019, using the modified retrospective transition method, which did not require the Company to adjust comparative periods. See Note 3 for the applicable disclosure of ASU 2016-02 adoption. .
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Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 3. Leases
The Company makes a determination if an arrangement constitutes a lease at inception, and categorizes the lease as either an operating or finance lease. Operating leases are included in right-of-use operating lease assets and operating lease liabilities in the Company's Condensed Consolidated Balance Sheets. Finance leases are included in property, plant and equipment, net and other long-term liabilities in the Condensed Consolidated Balance Sheets. Leases with an initial term of 12 months or less are not recorded on the Condensed Consolidated Balance Sheets.
The Company has entered into leases for building facilities, vehicles and other equipment. The Company’s leases have remaining contractual terms of up to 10 years, some of which have options to extend the lease for up to 10 years. For purposes of calculating operating lease liabilities, lease terms are deemed not to include options to extend the lease termination until it is reasonably certain that the Company will exercise that option. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Supplemental unaudited consolidated balance sheet information related to leases is as follows:
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Classification
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March 31, 2020
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(In thousands)
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Operating lease assets
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Right-of-use operating lease assets
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$
|
21,789
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Finance lease assets
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Property, plant and equipment, net
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22
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|
Total lease assets
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$
|
21,811
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|
|
|
|
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Operating lease liabilities - current
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Operating lease liabilities - current
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|
$
|
6,031
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|
Operating lease liabilities - noncurrent
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Operating lease liabilities - noncurrent
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|
16,010
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Finance lease liabilities
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|
Other long-term liabilities
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22
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|
Total lease liabilities
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|
$
|
22,063
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The components of lease expense are as follows:
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Three Months Ended March 31,
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Nine Months Ended March 31,
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Classification
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2020
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2020
|
(In thousands)
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Operating lease expense
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General and administrative expenses and cost of goods sold
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$
|
1,497
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|
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$
|
3,858
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Finance lease expense:
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Amortization of finance lease assets
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General and administrative expenses
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13
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|
|
39
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|
Interest on finance lease liabilities
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Interest expense
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—
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|
1
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Total lease expense
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$
|
1,510
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|
|
$
|
3,898
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Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
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March 31, 2020
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(In thousands)
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Operating Leases
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Finance Leases
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Maturities of lease liabilities are as follows:
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2020
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$
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1,532
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$
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13
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2021
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|
5,764
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|
9
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2022
|
|
4,357
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|
|
—
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2023
|
|
3,711
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|
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—
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2024
|
|
3,375
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|
|
—
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Thereafter
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|
6,272
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|
|
—
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|
Total lease payments
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|
25,011
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|
|
22
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|
Less: interest
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|
(2,970
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)
|
|
—
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Total lease obligations
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|
$
|
22,041
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|
|
$
|
22
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|
Lease term and discount rate:
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March 31, 2020
|
Weighted-average remaining lease terms (in years):
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Operating lease
|
|
8.5
|
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Finance lease
|
|
0.4
|
|
|
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Weighted-average discount rate:
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Operating lease
|
|
4.50
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%
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Finance lease
|
|
4.50
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%
|
Other Information:
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|
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Nine Months Ended
March 31, 2020
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Cash paid for amounts included in the measurement of lease liabilities:
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Operating cash flows from operating leases
|
|
$
|
3,585
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|
Operating cash flows from finance leases
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|
$
|
1
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|
Financing cash flows from finance leases
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|
$
|
38
|
|
|
|
|
Leased assets obtained in exchange for new finance lease liabilities
|
|
$
|
—
|
|
Leased assets obtained in exchange for new operating lease liabilities
|
|
$
|
—
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|
Disclosures related to periods prior to adoption of ASU 2016-02
Rent expense paid for the fiscal year ended June 30, 2019 was $6.4 million.
The minimum annual payments under operating and capital leases as of June 30, 2019 are as follows:
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
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|
(In thousands)
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Operating
Lease
Obligations
|
|
Capital
Lease
Obligations
|
Year Ended June 30,
|
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2020
|
|
$
|
4,434
|
|
|
$
|
36
|
|
2021
|
|
3,238
|
|
|
1
|
|
2022
|
|
2,472
|
|
|
—
|
|
2023
|
|
2,131
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|
|
—
|
|
2024
|
|
2,025
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|
|
—
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|
Thereafter
|
|
4,389
|
|
|
—
|
|
Total minimum lease payments
|
|
$
|
18,689
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|
|
37
|
|
Less: imputed interest
(0.82% to 10.66%)
|
|
|
|
(2
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)
|
Present value of future minimum lease payments
|
|
|
|
35
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|
Less: current portion
|
|
|
|
(34
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)
|
Long-term capital lease obligations
|
|
|
|
$
|
1
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|
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 4. Derivative Instruments
Derivative Instruments Held
Coffee-Related Derivative Instruments
The Company is exposed to commodity price risk associated with its price to fixed green coffee purchase contracts, which are described further in Note 2 to the consolidated financial statements in the 2019 Form 10-K. The Company utilizes forward and option contracts to manage exposure to the variability in expected future cash flows from forecasted purchases of green coffee attributable to commodity price risk. Certain of these coffee-related derivative instruments utilized for risk management purposes have been designated as cash flow hedges, while other coffee-related derivative instruments have not been designated as cash flow hedges or do not qualify for hedge accounting despite hedging the Company’s future cash flows on an economic basis.
The following table summarizes the notional volumes for the coffee-related derivative instruments held by the Company at March 31, 2020 and June 30, 2019:
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(In thousands)
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|
March 31, 2020
|
|
June 30, 2019
|
Derivative instruments designated as cash flow hedges:
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|
|
Long coffee pounds
|
|
33,900
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|
|
42,113
|
|
Derivative instruments not designated as cash flow hedges:
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|
|
|
|
Long coffee pounds
|
|
4,911
|
|
|
6,070
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|
Total
|
|
38,811
|
|
|
48,183
|
|
Coffee-related derivative instruments designated as cash flow hedges outstanding as of March 31, 2020 will expire within 21 months. At March 31, 2020 and June 30, 2019 approximately 87%, respectively, of the Company's outstanding coffee-related derivative instruments were designated as cash flow hedges.
Interest Rate Swap Derivative Instruments
Pursuant to an International Swap Dealers Association, Inc. Master Agreement (“ISDA”) which was effective March 20, 2019, the Company on March 27, 2019, entered into an interest rate swap transaction utilizing a notional amount of $80.0 million, with an effective date of April 11, 2019 and a maturity date of October 11, 2023 (the “Rate Swap”). In December 2019, the Company amended the notional amount to $65.0 million. The Rate Swap is intended to manage the Company’s interest rate risk on its floating-rate indebtedness under the Company’s revolving credit facility. Under the terms of the Rate Swap, the Company receives 1-month LIBOR, subject to a 0% floor, and makes payments based on a fixed rate of 2.1975%. The Company’s obligations under the ISDA are secured by the collateral which secures the loans under the revolving credit facility on a pari passu and pro rata basis with the principal of such loans. The Company has designated the Rate Swap derivative instruments as a cash flow hedge.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Effect of Derivative Instruments on the Financial Statements
Balance Sheets
Fair values of derivative instruments on the Company’s condensed consolidated balance sheets:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments
Designated as Cash Flow Hedges
|
|
Derivative Instruments Not Designated as Accounting Hedges
|
|
|
March 31, 2020
|
|
June 30, 2019
|
|
March 31, 2020
|
|
June 30, 2019
|
(In thousands)
|
|
|
|
|
|
|
|
|
Financial Statement Location:
|
|
|
|
|
|
|
|
|
Short-term derivative assets:
|
|
|
|
|
|
|
|
|
Coffee-related derivative instruments(1)
|
|
$
|
2,208
|
|
|
$
|
1,254
|
|
|
$
|
625
|
|
|
$
|
611
|
|
Long-term derivative assets:
|
|
|
|
|
|
|
|
|
Coffee-related derivative instruments (2)
|
|
$
|
470
|
|
|
$
|
671
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Short-term derivative liabilities:
|
|
|
|
|
|
|
|
|
Coffee-related derivative instruments (3)
|
|
$
|
257
|
|
|
$
|
1,114
|
|
|
$
|
38
|
|
|
$
|
114
|
|
Interest rate swap derivative instruments (3)
|
|
$
|
1,106
|
|
|
$
|
246
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Long-term derivative liabilities:
|
|
|
|
|
|
|
|
|
Coffee-related derivative instruments (4)
|
|
$
|
3
|
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest rate swap derivative instruments (4)
|
|
$
|
2,745
|
|
|
$
|
1,599
|
|
|
$
|
—
|
|
|
$
|
—
|
|
________________
(1) Included in “Short-term derivative assets” on the Company’s condensed consolidated balance sheets.
(2) Included in “Long-term derivative assets” on the Company's condensed consolidated balance sheets.
(3) Included in “Short-term liabilities” on the Company's condensed consolidated balance sheets.
(4) Included in “Other long-term liabilities” on the Company's condensed consolidated balance sheets.
Statements of Operations
The following table presents pretax net gains and losses for the Company's derivative instruments designated as cash flow hedges, as recognized in “AOCI,” “Cost of goods sold” and “Other, net”.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
|
Financial Statement Classification
|
(In thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Net losses recognized in AOCI - Interest rate swap
|
|
$
|
(2,542
|
)
|
|
$
|
(78
|
)
|
|
$
|
(2,590
|
)
|
|
$
|
(78
|
)
|
|
AOCI
|
Net losses recognized from AOCI to earnings - Interest rate swap
|
|
$
|
(83
|
)
|
|
$
|
—
|
|
|
$
|
(115
|
)
|
|
$
|
—
|
|
|
Interest Expense
|
Net losses reclassified from AOCI to earnings for partial unwind of interest swap - Interest rate swap (1)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(407
|
)
|
|
$
|
—
|
|
|
Interest Expense
|
Net (losses) gains recognized in AOCI - Coffee-related
|
|
$
|
(5,681
|
)
|
|
$
|
(3,988
|
)
|
|
$
|
1,750
|
|
|
$
|
(11,176
|
)
|
|
AOCI
|
Net losses recognized in earnings - Coffee - related
|
|
$
|
(1,976
|
)
|
|
$
|
(2,131
|
)
|
|
$
|
(8,898
|
)
|
|
$
|
(6,310
|
)
|
|
Cost of goods sold
|
________________
|
|
(1)
|
The $407 thousand of realized loss was due to partial unwinding of interest rate swap resulting from the amendment of the notional amount from $80 million to $65 million.
|
For the three and nine months ended March 31, 2020 and 2019, there were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness.
Net losses (gains) on derivative instruments in the Company’s condensed consolidated statements of cash flows also include net losses (gains) on coffee-related derivative instruments designated as cash flow hedges reclassified to cost of goods sold from AOCI in the three and nine months ended March 31, 2020 and 2019. Gains and losses on derivative instruments not designated as accounting hedges are included in “Other, net” in the Company’s condensed consolidated statements of operations
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
and in “Net losses (gains) on derivative instruments and investments” in the Company’s condensed consolidated statements of cash flows.
Net gains and losses recorded in “Other, net” are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
(In thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Net losses on coffee-related derivative instruments(1)
|
|
$
|
(308
|
)
|
|
$
|
(893
|
)
|
|
$
|
(932
|
)
|
|
$
|
(2,918
|
)
|
Non-operating pension and other postretirement benefit (2)
|
|
1,248
|
|
|
1,394
|
|
|
3,744
|
|
|
4,921
|
|
Other gains (losses), net
|
|
136
|
|
|
(6
|
)
|
|
129
|
|
|
102
|
|
Other, net
|
|
$
|
1,076
|
|
|
$
|
495
|
|
|
$
|
2,941
|
|
|
$
|
2,105
|
|
___________
(1) Excludes net gains and losses on coffee-related derivative instruments designated as cash flow hedges recorded in cost of goods sold in the three and nine months ended March 31, 2020 and 2019.
(2) Presented in accordance with ASU 2017-07.
Offsetting of Derivative Assets and Liabilities
The Company has agreements in place that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, under certain coffee derivative agreements, the Company maintains accounts with its counterparties to facilitate financial derivative transactions in support of its risk management activities.
The following table presents the Company’s net exposure from its offsetting derivative asset and liability positions, as well as cash collateral on deposit with its counterparties as of the reporting dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
Gross Amount Reported on Balance Sheet
|
|
Netting Adjustments
|
|
Cash Collateral Posted
|
|
Net Exposure
|
March 31, 2020
|
|
Derivative Assets
|
|
$
|
3,303
|
|
|
$
|
(298
|
)
|
|
$
|
—
|
|
|
$
|
3,005
|
|
|
|
Derivative Liabilities
|
|
$
|
4,149
|
|
|
$
|
(298
|
)
|
|
$
|
—
|
|
|
$
|
3,851
|
|
June 30, 2019
|
|
Derivative Assets
|
|
$
|
2,539
|
|
|
$
|
(698
|
)
|
|
$
|
—
|
|
|
$
|
1,841
|
|
|
|
Derivative Liabilities
|
|
$
|
3,086
|
|
|
$
|
(698
|
)
|
|
$
|
—
|
|
|
$
|
2,388
|
|
Cash Flow Hedges
Changes in the fair value of the Company’s coffee-related derivative instruments designated as cash flow hedges are deferred in AOCI and subsequently reclassified into cost of goods sold in the same period or periods in which the hedged forecasted purchases affect earnings, or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. Based on recorded values at March 31, 2020, $3.6 million of net gains on coffee-related derivative instruments designated as a cash flow hedge are expected to be reclassified into cost of goods sold within the next twelve months. These recorded values are based on market prices of the commodities as of March 31, 2020.
Changes in the fair value of the Company's interest rate swap derivative instruments designated as a cash flow hedge are deferred in AOCI and subsequently reclassified into interest expense in the period or periods when the hedged transaction affects earnings or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. As of March 31, 2020, $1.1 million of net losses on interest rate swap derivative instruments designated as a cash flow hedge are expected to be reclassified into interest expense within the next twelve months assuming no significant changes in the LIBOR rates. Due to LIBOR volatility, actual gains or losses realized within the next twelve months will likely differ from these values.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 5. Fair Value Measurements
Assets and liabilities measured and recorded at fair value on a recurring basis were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
March 31, 2020
|
|
|
|
|
|
|
|
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
Coffee-related derivative assets (1)
|
|
$
|
2,678
|
|
|
$
|
—
|
|
|
$
|
2,678
|
|
|
$
|
—
|
|
Coffee-related derivative liabilities (1)
|
|
$
|
260
|
|
|
$
|
—
|
|
|
$
|
260
|
|
|
$
|
—
|
|
Interest rate swap derivative liabilities (2)
|
|
$
|
3,851
|
|
|
$
|
—
|
|
|
$
|
3,851
|
|
|
$
|
—
|
|
Derivative instruments not designated as accounting hedges:
|
|
|
|
|
|
|
|
|
Coffee-related derivative assets(1)
|
|
$
|
625
|
|
|
$
|
—
|
|
|
$
|
625
|
|
|
$
|
—
|
|
Coffee-related derivative liabilities(1)
|
|
$
|
38
|
|
|
$
|
—
|
|
|
$
|
38
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
June 30, 2019
|
|
|
|
|
|
|
|
|
Derivative instruments designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
Coffee-related derivative assets (1)
|
|
$
|
1,925
|
|
|
$
|
—
|
|
|
$
|
1,925
|
|
|
$
|
—
|
|
Coffee-related derivative liabilities (1)
|
|
$
|
1,127
|
|
|
$
|
—
|
|
|
$
|
1,127
|
|
|
$
|
—
|
|
Interest rate swap derivative liabilities (2)
|
|
$
|
1,845
|
|
|
$
|
—
|
|
|
$
|
1,845
|
|
|
$
|
—
|
|
Derivative instruments not designated as accounting hedges:
|
|
|
|
|
|
|
|
|
Coffee-related derivative assets (1)
|
|
$
|
614
|
|
|
$
|
—
|
|
|
$
|
614
|
|
|
$
|
—
|
|
Coffee-related derivative liabilities (1)
|
|
$
|
114
|
|
|
$
|
—
|
|
|
$
|
114
|
|
|
$
|
—
|
|
____________________
|
|
(1)
|
The Company's coffee-related derivative instruments are traded over-the-counter and, therefore, classified as Level 2.
|
|
|
(2)
|
The Company's interest rate swap derivative instrument are model-derived valuations with directly or indirectly observable significant inputs such as interest rate and, therefore, classified as Level 2.
|
Note 6. Accounts Receivable, Net
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2020
|
|
June 30, 2019
|
Trade receivables
|
|
$
|
49,328
|
|
|
$
|
53,593
|
|
Other receivables(1)
|
|
2,266
|
|
|
2,886
|
|
Allowance for doubtful accounts
|
|
(705
|
)
|
|
(1,324
|
)
|
Accounts receivable, net
|
|
$
|
50,889
|
|
|
$
|
55,155
|
|
__________
(1) Includes vendor rebates and other non-trade receivables.
The $0.6 million decrease in the allowance for doubtful accounts during the nine months ended March 31, 2020 was due to improvement of the Company’s accounts receivable aging balance.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 7. Inventories
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2020
|
|
June 30, 2019
|
Coffee
|
|
|
|
|
Processed
|
|
$
|
24,568
|
|
|
$
|
25,769
|
|
Unprocessed
|
|
36,905
|
|
|
33,259
|
|
Total
|
|
$
|
61,473
|
|
|
$
|
59,028
|
|
Tea and culinary products
|
|
|
|
|
Processed
|
|
$
|
17,737
|
|
|
$
|
21,767
|
|
Unprocessed
|
|
68
|
|
|
74
|
|
Total
|
|
$
|
17,805
|
|
|
$
|
21,841
|
|
Coffee brewing equipment parts
|
|
$
|
6,656
|
|
|
$
|
7,041
|
|
Total inventories
|
|
$
|
85,934
|
|
|
$
|
87,910
|
|
In addition to product cost, inventory costs include expenditures such as direct labor and certain supply, freight, warehousing, overhead variances, purchase price variance and other expenses incurred in bringing the inventory to its existing condition and location. The “Unprocessed” inventory values as stated in the above table represent the value of raw materials and the “Processed” inventory values represent all other products consisting primarily of finished goods.
Note 8. Property, Plant and Equipment
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2020
|
|
June 30, 2019
|
Buildings and facilities (1)
|
|
$
|
99,225
|
|
|
$
|
107,915
|
|
Machinery, vehicles and equipment (1)
|
|
243,141
|
|
|
249,477
|
|
Capitalized software
|
|
29,227
|
|
|
27,666
|
|
Office furniture and equipment
|
|
14,121
|
|
|
14,035
|
|
|
|
$
|
385,714
|
|
|
$
|
399,093
|
|
Accumulated depreciation
|
|
(229,493
|
)
|
|
(225,826
|
)
|
Land (1)
|
|
13,140
|
|
|
16,191
|
|
Property, plant and equipment, net
|
|
$
|
169,361
|
|
|
$
|
189,458
|
|
__________
(1) Decrease as of March 31, 2020 is due to the sale of assets. See Note 21 for details.
Coffee Brewing Equipment (“CBE”) and Service
Capitalized CBE included in machinery and equipment above are:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2020
|
|
June 30, 2019
|
Coffee Brewing Equipment
|
|
$
|
102,423
|
|
|
$
|
106,593
|
|
Accumulated depreciation
|
|
(69,094
|
)
|
|
$
|
(70,202
|
)
|
Coffee Brewing Equipment, net
|
|
$
|
33,329
|
|
|
$
|
36,391
|
|
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Depreciation expense related to capitalized CBE and other CBE related expenses (excluding CBE depreciation) provided to customers and reported in cost of goods sold were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
(In thousands)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Depreciation expense
|
|
$
|
2,359
|
|
|
$
|
2,269
|
|
|
$
|
7,239
|
|
|
$
|
6,665
|
|
|
|
|
|
|
|
|
|
|
Other CBE expenses
|
|
$
|
7,821
|
|
|
$
|
10,458
|
|
|
$
|
23,778
|
|
|
$
|
27,375
|
|
Other expenses related to CBE provided to customers, such as the cost of servicing that equipment (including service employees’ salaries, cost of transportation and the cost of supplies and parts), are considered directly attributable to the generation of revenues from the customers. Therefore, these costs are included in cost of goods sold.
Note 9. Goodwill and Intangible Assets
The carrying value of goodwill was fully impaired and written down to zero at March 31, 2020. See below. The carrying value of goodwill at June 30, 2019 was $36.2 million.
The following is a summary of the Company’s amortized and unamortized intangible assets other than goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
June 30, 2019
|
|
|
(In thousands)
|
|
Weighted
Average
Amortization
Period as of
March 31, 2020
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Impairment
|
|
Net
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
7.2
|
|
$
|
33,003
|
|
|
$
|
(16,943
|
)
|
|
$
|
—
|
|
|
$
|
16,060
|
|
|
$
|
33,003
|
|
|
$
|
(15,291
|
)
|
|
$
|
17,712
|
|
Non-compete agreements
|
|
2.0
|
|
220
|
|
|
(151
|
)
|
|
—
|
|
|
69
|
|
|
220
|
|
|
(122
|
)
|
|
98
|
|
Recipes
|
|
3.7
|
|
930
|
|
|
(453
|
)
|
|
—
|
|
|
477
|
|
|
930
|
|
|
(354
|
)
|
|
576
|
|
Trade name/brand name
|
|
4.3
|
|
510
|
|
|
(374
|
)
|
|
—
|
|
|
136
|
|
|
510
|
|
|
(346
|
)
|
|
164
|
|
Total amortized intangible assets
|
|
|
|
$
|
34,663
|
|
|
$
|
(17,921
|
)
|
|
$
|
—
|
|
|
$
|
16,742
|
|
|
$
|
34,663
|
|
|
$
|
(16,113
|
)
|
|
$
|
18,550
|
|
Unamortized intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks, trade names and brand name with indefinite lives
|
|
|
|
$
|
10,328
|
|
|
$
|
—
|
|
|
$
|
(5,806
|
)
|
|
$
|
4,522
|
|
|
$
|
10,328
|
|
|
$
|
—
|
|
|
$
|
10,328
|
|
Total unamortized intangible assets
|
|
|
|
$
|
10,328
|
|
|
$
|
—
|
|
|
$
|
(5,806
|
)
|
|
$
|
4,522
|
|
|
$
|
10,328
|
|
|
$
|
—
|
|
|
$
|
10,328
|
|
Total intangible assets
|
|
|
|
$
|
44,991
|
|
|
$
|
(17,921
|
)
|
|
$
|
(5,806
|
)
|
|
$
|
21,264
|
|
|
$
|
44,991
|
|
|
$
|
(16,113
|
)
|
|
$
|
28,878
|
|
Aggregate amortization expense for the three months ended March 31, 2020 and 2019 was $0.6 million and $0.7 million, respectively. Aggregate amortization expense for the nine months ended March 31, 2020 and 2019 was $1.8 million and $2.0 million, respectively.
The Company tests goodwill and indefinite-lived intangible assets for impairment annually, as of January 31, or when events or changes in circumstances would indicate that more likely than not the fair values may be below the carrying amounts of the assets. The Company also assessed the recoverability of certain finite-lived intangible assets. Additionally, for the nine months ended March 31, 2020, the changes in the business environment and the general economic outlook as a result of the COVID-19 pandemic have negatively impacted the fair value of these assets.
As a result of these tests for impairment, the Company recorded $36.2 million and $5.8 million, respectively, of impairments to goodwill and indefinite-lived intangibles for the three and nine months ended March 31, 2020. No impairment was recorded for the finite-lived intangibles for the three and nine months ended March 31, 2020.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 10. Employee Benefit Plans
Single Employer Pension Plans
Effective June 30, 2011, the Company amended its defined benefit pension plans, freezing the benefit for all participants. As of the effective date, participants do not accrue any benefits under the plans, and new hires are not eligible to participate in the plans.
The net periodic benefit cost for the defined benefit pension plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
(In thousands)
|
|
|
|
|
Service cost
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest cost
|
|
1,059
|
|
|
1,173
|
|
|
3,177
|
|
|
4,025
|
|
Expected return on plan assets
|
|
(1,102
|
)
|
|
(1,126
|
)
|
|
(3,305
|
)
|
|
(4,096
|
)
|
Amortization of net loss(1)
|
|
370
|
|
|
380
|
|
|
1,109
|
|
|
1,120
|
|
Pension settlement charge
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10,948
|
|
Net periodic benefit cost
|
|
$
|
327
|
|
|
$
|
427
|
|
|
$
|
981
|
|
|
$
|
11,997
|
|
___________
(1) These amounts represent the estimated portion of the net loss in AOCI that is expected to be recognized as a component of net periodic benefit cost over the current fiscal year.
Weighted-Average Assumptions Used to Determine Net Periodic Benefit Cost
|
|
|
|
|
|
|
|
March 31, 2020
|
|
June 30, 2019
|
Discount rate
|
|
3.45%
|
|
4.05%
|
Expected long-term return on plan assets
|
|
6.75%
|
|
6.75%
|
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.
Contributions made by the Company to the multiemployer pension plans were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
(In thousands)
|
|
|
|
|
Contributions
|
|
$
|
240
|
|
|
$
|
585
|
|
|
$
|
1,120
|
|
|
$
|
1,364
|
|
Outstanding balance of settlement obligations of the Company to certain multiemployer pension plans are as follows:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2020
|
|
June 30, 2019
|
WCT Pension Trust (1)
|
|
$
|
—
|
|
|
$
|
1,487
|
|
Local 807 Pension Fund (2)
|
|
$
|
182
|
|
|
$
|
182
|
|
__________
(1) Initial liability amount of $3.4 million, including interest, commencing in September 10, 2018, payable in 17 monthly installments of $190,507 followed by a final monthly installment of $153,822 in February 2020.
(2) Lump sum cash settlement payment of $3.0 million plus two remaining installment payments of $91,000 due on or before October 1, 2034 and on or before January 1, 2035. As of March 31, 2020, the Company has paid the Local 807 Pension Fund $3.0 million and has accrued $0.2 million within “Accrued pension liabilities” on the Company’s condensed consolidated balance sheet.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Multiemployer Plans Other Than Pension Plans
The Company participates in nine multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. The plans are subject to the provisions of the Employee Retirement Income Security Act of 1974, and provide that participating employers make monthly contributions to the plans in an amount as specified in the collective bargaining agreements. Also, the plans provide that participants make self-payments to the plans, the amounts of which are negotiated through the collective bargaining process. The Company’s participation in these plans is governed by collective bargaining agreements which expire on or before June 30, 2022.
401(k) Plan
The Company’s 401(k) Plan is available to all eligible employees. Participants in the 401(k) Plan may choose to contribute a percentage of their annual pay subject to the maximum contribution allowed by the Internal Revenue Service. The Company recorded matching contributions of $0.5 million and $0.7 million in operating expenses in the three months ended March 31, 2020 and 2019, respectively. The Company recorded matching contributions of $1.9 million and $1.6 million in operating expenses in the nine months ended March 31, 2020 and 2019, respectively. Effective March 31, 2020, the Company temporarily suspended its 401K matching program in response to the COVID-19 pandemic.
Additionally, the Company makes an annual safe harbor non-elective contribution of shares of the Company’s common stock equal to 4% of each eligible participant’s annual plan compensation. During the three and nine months ended March 31, 2020, the Company contributed a total of 104,247 and 213,896 shares of the Company’s common stock with a value of $0.9 million and $2.3 million, respectively, to eligible participants’ annual plan compensation. During the three and nine months ended March 31, 2019, the Company contributed a total of 37,571 shares of the Company’s common stock with a value of $0.7 million to eligible participants’ annual plan compensation.
Postretirement Benefits
Retiree Medical Plan and Death Benefit
On March 23, 2020, the Company announced a plan to amend and terminate the postretirement medical benefit plan that covers qualified non-union retirees and certain qualified union retirees (“Retiree Medical Plan”) effective January 1, 2021. 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 was unfunded and its liability was calculated using an assumed discount rate.
The Company’s communication of its intention to amend and terminate the Retiree Medical Plan triggered re-measurement and curtailment of the plan. As a result, the re-measurement generated a prior service credit of $13.4 million to be amortized over the remaining nine months of the plan, and a revised net periodic postretirement benefit credit for the fourth quarter of fiscal 2020 of $7.2 million. Also, the Company recognized a one-time non-cash curtailment credit of $5.8 million for the three and nine months ended March 31, 2020.
The Company continues to provide 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.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The following table shows the components of net periodic postretirement benefit cost (credit) for the Retiree Medical Plan and Death Benefit for the three and nine months ended March 31, 2020 and 2019. Net periodic postretirement benefit cost was based on employee census information and asset information as of June 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
(In thousands)
|
|
|
|
|
|
|
|
|
Components of Net Periodic Postretirement Benefit Cost (Credit):
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
147
|
|
|
$
|
133
|
|
|
$
|
441
|
|
|
$
|
399
|
|
Interest cost
|
|
214
|
|
|
222
|
|
|
641
|
|
|
666
|
|
Amortization of net gain
|
|
(125
|
)
|
|
(209
|
)
|
|
(374
|
)
|
|
(627
|
)
|
Curtailment credit - Retiree Medical
|
|
(5,750
|
)
|
|
—
|
|
|
(5,750
|
)
|
|
—
|
|
Amortization of prior service credit
|
|
(395
|
)
|
|
(439
|
)
|
|
(1,186
|
)
|
|
(1,317
|
)
|
Net periodic postretirement benefit credit
|
|
$
|
(5,909
|
)
|
|
$
|
(293
|
)
|
|
$
|
(6,228
|
)
|
|
$
|
(879
|
)
|
Weighted-Average Assumptions Used to Determine Net Periodic Postretirement Benefit Cost
|
|
|
|
|
|
|
|
Fiscal
|
|
|
2020
|
|
2019
|
Retiree Medical Plan discount rate
|
|
3.44%
|
|
4.25%
|
Death Benefit discount rate
|
|
3.64%
|
|
4.25%
|
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 11. Debt Obligations
The following table summarizes the Company’s debt obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
June 30, 2019
|
(In thousands)
|
|
Debt Origination Date
|
|
Maturity
|
|
Original Borrowing Amount
|
|
Carrying Value
|
|
Weighted Average Interest Rate
|
|
Carrying Value
|
|
Weighted Average Interest Rate
|
Credit Facility
|
|
Revolver
|
|
11/6/2023
|
|
N/A
|
|
$
|
80,000
|
|
|
4.45
|
%
|
|
$
|
92,000
|
|
|
3.98
|
%
|
In March 2020, pursuant to Amendment No. 2 to Amended and Restated Credit Agreement (the “Second Amendment”) the Company amended its existing senior secured revolving credit facility (such facility as amended to date, including pursuant to the Second Amendment, the “Amended Revolving Facility”) with Bank of America, N.A, Citibank, N.A., JPMorgan Chase Bank, N.A., PNC Bank, National Association, Regions Bank, and SunTrust Bank. The Second Amendment, among other things: (i) decreased the size of the revolving credit facility to $125.0 million from $150.0 million; (ii) made certain adjustments to the commitment fee rates and interest rates; (iii) increased the maximum total net leverage ratio financial covenant until the quarter ending December 31, 2021; (iv) added a minimum EBITDA financial covenant until the quarter ending December 31, 2021; (v) amended the definitions of “EBITDA” and “Permitted Acquisition”; (vi) removed the accordion feature; (vii) removed the Company’s option to request and agree to an extension of the maturity date with individual lenders; (viii) provided for a mortgage on certain of the Company’s real property; (ix) provides for the revolving commitments to be reduced upon the occurrence of certain asset dispositions and incurrences of other indebtedness; (x) added a monthly reporting requirement; and (xi) modified certain of the Company’s covenant-related baskets.
The Amended Revolving Facility otherwise retained many of its previous terms, including the sublimit on letters of credit and swingline loans of $15.0 million each. The commitment fee is based on a leverage grid and ranges from 0.20% to 0.50%. Borrowings under the Amended Revolving Facility bear interest on base rate loans based on a leverage grid with a range of PRIME + 0.50% to 2.50%, and on Eurodollar loans based on a leverage grid with a range of Adjusted LIBO Rate + 1.50% to 3.50%. Effective March 27, 2019, the Company entered into a rate swap agreement and in December 2019 amended the agreement to reduce the notional amount. The impact of the amendment for the nine months ended March 31, 2020, was $0.4 million of realized loss due to the partial unwinding of interest rate swap resulting from the amendment of the notional amount from $80.0 million to $65.0 million. See Note 4 for details.
Under the Amended Revolving Facility, the Company is subject to a variety of affirmative and negative covenants of types customary in a senior secured lending facility, including financial covenants relating to leverage, interest expense coverage and (until the quarter ending December 31, 2021) minimum adjusted EBITDA. The Company is allowed to pay dividends, provided, among other things, a total net leverage ratio is met, and no default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The Amended Revolving Facility has no scheduled payback required on the principal prior to the maturity date on November 6, 2023.
At March 31, 2020, the Company was in compliance with all of the covenants under the Amended Revolving Facility. See Note 1,“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Capital Resources and Financial Condition” on consideration of future debt covenants compliance.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 12. Employee Stock Ownership Plan
The Company’s ESOP was established in 2000. As of December 31, 2018, the Company froze the ESOP such that (i) no employees of the Company may commence participation in the ESOP on or after December 31, 2018; (ii) no Company contributions will be made to the ESOP with respect to services performed or compensation received after December 31, 2018; and (iii) the ESOP accounts of all individuals who are actively employed by the Company and participating in the ESOP on December 31, 2018 will be fully vested as of such date. Additionally, the Administrative Committee, with the consent of the Board of Directors, designated certain employees who were terminated in connection with certain reductions-in-force in 2018 to be fully vested in their ESOP accounts as of their severance dates.
Shares are held by the plan trustee for allocation among 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.
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
June 30, 2019
|
Allocated shares
|
|
1,191,754
|
|
|
1,393,530
|
|
Committed to be released shares
|
|
—
|
|
|
—
|
|
Unallocated shares
|
|
—
|
|
|
—
|
|
Total ESOP shares
|
|
1,191,754
|
|
|
1,393,530
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fair value of ESOP shares
|
|
$
|
8,295
|
|
|
$
|
22,812
|
|
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 13. Share-based Compensation
Farmer Bros. Co. Long-Term Incentive Plan
As of March 31, 2020, there were 544,857 shares available under the 2017 Plan including shares that were forfeited under the Prior Plans for future issuance. As of March 31, 2020, there were 300,000 shares available under the 2020 Inducement Plan of which 88,495 were issued on April 1, 2020.
Non-qualified stock options with time-based vesting (“NQOs”)
One-third of the total number of shares subject to each stock option vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.
Following are the assumptions used in the Black-Scholes valuation model for NQOs granted during the nine months ended March 31, 2020:
|
|
|
|
|
|
|
|
Nine Months Ended March 31, 2020
|
Weighted average fair value of NQOs
|
|
$
|
4.68
|
|
Risk-free interest rate
|
|
1.7
|
%
|
Dividend yield
|
|
—
|
%
|
Average expected term
|
|
4.6 years
|
|
Expected stock price volatility
|
|
35.4
|
%
|
The following table summarizes NQO activity for the nine months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding NQOs:
|
|
Number
of NQOs
|
|
Weighted
Average
Exercise
Price ($)
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
Aggregate
Intrinsic
Value
($ in thousands)
|
Outstanding at June 30, 2019
|
|
198,049
|
|
|
27.35
|
|
5.25
|
|
40
|
|
Granted
|
|
447,973
|
|
|
14.44
|
|
—
|
|
—
|
|
Exercised
|
|
(10,360
|
)
|
|
12.48
|
|
—
|
|
28
|
|
Forfeited
|
|
(112,624
|
)
|
|
26.55
|
|
—
|
|
—
|
|
Expired
|
|
(37,342
|
)
|
|
31.43
|
|
—
|
|
—
|
|
Outstanding at March 31, 2020
|
|
485,696
|
|
|
15.63
|
|
6.42
|
|
—
|
|
Exercisable at March 31, 2020
|
|
20,702
|
|
|
28.16
|
|
4.97
|
|
—
|
|
The weighted-average grant-date fair value of options granted during the nine months ended March 31, 2020 was $4.68. The aggregate intrinsic values outstanding at the end of period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of $6.96 at March 31, 2020 and $16.37 at June 28, 2019, representing the last trading day of the respective periods, 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 the nine months ended March 31, 2020 represents the difference between the exercise price and the value of the Company’s common stock at the time of exercise. NQOs outstanding that are expected to vest are net of estimated forfeitures.
The Company received $0.1 million and $0.3 million in proceeds from exercises of vested NQOs during the nine months ended March 31, 2020 and 2019, respectively.
At March 31, 2020 and June 30, 2019, respectively, there were $1.9 million and $1.1 million of unrecognized NQO compensation cost. The unrecognized NQO compensation cost at March 31, 2020 is expected to be recognized over the weighted average period of 2.5 years. Total compensation expense for NQOs was $167.3 thousand and $185.8 thousand for the three months ended March 31, 2020 and 2019, respectively. Total compensation expense for NQOs was $444.9 thousand and $454.8 thousand for the nine months ended March 31, 2020 and 2019, respectively.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Non-qualified stock options with performance-based and time-based vesting (“PNQs”)
The following table summarizes PNQ activity for the nine months ended March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding PNQs:
|
|
Number
of
PNQs
|
|
Weighted
Average
Exercise
Price ($)
|
|
|
Weighted
Average
Remaining
Life
(Years)
|
|
Aggregate
Intrinsic
Value
($ in
thousands)
|
Outstanding at June 30, 2019
|
|
229,961
|
|
|
26.21
|
|
|
1.23
|
|
—
|
|
Granted
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Exercised
|
|
—
|
|
|
—
|
|
|
—
|
|
—
|
|
Forfeited
|
|
(6,212
|
)
|
|
32.85
|
|
|
—
|
|
—
|
|
Expired
|
|
(210,119
|
)
|
|
25.86
|
|
|
—
|
|
—
|
|
Outstanding at March 31, 2020
|
|
13,630
|
|
|
28.60
|
|
|
2.61
|
|
—
|
|
Exercisable at March 31, 2020
|
|
8,822
|
|
|
26.89
|
|
|
2.23
|
|
—
|
|
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 $6.96 at March 31, 2020 and $16.37 at June 28, 2019, representing the last trading day of the respective fiscal periods, which would have been received by PNQ holders had all award holders exercised their PNQs that were in-the-money as of those dates. The aggregate intrinsic value of PNQ exercises in the nine months ended March 31, 2020 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.
There were no options exercised during the nine months ended March 31, 2020. The Company received $0.1 million in proceeds from exercises of vested PNQs during the nine months ended March 31, 2019.
At March 31, 2020 and June 30, 2019, there were zero and $39.7 thousand, respectively, of unrecognized PNQ compensation cost. Total compensation expense related to PNQs in the three months ended March 31, 2020 and 2019 were zero and $56.1 thousand, respectively. Total compensation expense related to PNQs in the nine months ended March 31, 2020 and 2019 were $18.3 thousand and $324.5 thousand, respectively.
Restricted Stock
The following table summarizes restricted stock activity for the nine months ended March 31, 2020:
|
|
|
|
|
|
|
|
Outstanding and Nonvested Restricted Stock Awards:
|
|
Shares
Awarded
|
|
Weighted
Average
Grant Date
Fair Value
($)
|
Outstanding and nonvested at June 30, 2019
|
|
32,056
|
|
|
21.10
|
|
Granted
|
|
83,692
|
|
|
15.26
|
|
Vested/Released
|
|
(18,298
|
)
|
|
23.98
|
|
Cancelled/Forfeited
|
|
(10,809
|
)
|
|
20.37
|
|
Outstanding and nonvested at March 31, 2020
|
|
86,641
|
|
|
15.53
|
|
The total grant-date fair value of restricted stock granted during the nine months ended March 31, 2020 was $1.3 million.
At March 31, 2020 and June 30, 2019, there were $0.8 million and $0.4 million, respectively, of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at March 31, 2020 is expected to be recognized over the weighted average period of 0.7 years. Total compensation expense for restricted stock were $0.3 million and $0.1 million, respectively, in the three months ended March 31, 2020 and 2019. Total compensation expense for restricted stock in the nine months ended March 31, 2020 and 2019 were $0.7 million and $0.3 million, respectively.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Performance-Based Restricted Stock Units (“PBRSUs”)
The following table summarizes PBRSU activity for the nine months ended March 31, 2020:
|
|
|
|
|
|
|
|
Outstanding and Nonvested PBRSUs:
|
|
PBRSUs
Awarded(1)
|
|
Weighted
Average
Grant Date
Fair Value
($)
|
Outstanding and nonvested at June 30, 2019
|
|
51,237
|
|
|
27.69
|
|
Granted(1)
|
|
81,236
|
|
|
14.46
|
|
Vested/Released
|
|
—
|
|
|
—
|
|
Cancelled/Forfeited
|
|
(38,262
|
)
|
|
27.38
|
|
Outstanding and nonvested at March 31, 2020
|
|
94,211
|
|
|
16.41
|
|
_____________
(1) The target number of PBRSUs is presented in the table. Under the terms of the awards, the recipient may earn between 0% and 200% 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 total grant-date fair value of PBRSUs granted during the nine months ended March 31, 2020 was $1.2 million.
At March 31, 2020 and June 30, 2019, there were $0.6 million and $0.3 million, respectively, of unrecognized PBRSU compensation cost. The unrecognized PBRSU compensation cost at March 31, 2020 is expected to be recognized over the weighted average period of 2.4 years. Total compensation expense for PBRSUs were $17.9 thousand and $149.0 thousand, respectively, for the three months ended March 31, 2020 and 2019. Total compensation expense for PBRSUs were $0.1 million and $0.3 million, respectively, for the nine months ended March 31, 2020 and 2019.
Performance Cash Awards (“PCAs”)
In November 2019, the Company granted PCAs under the 2017 Plan to certain employees. The PCAs 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, 2019 through June 30, 2022, subject to certain continued employment conditions and subject to acceleration provisions of the 2017 Plan. At the end of the three-year performance period, the amount of PCAs that actually vest will be 0% to 200% 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.
The PCAs are measured initially based on a fixed amount of the awards at the date of grant and are required to be re-measured based on the probability of achieving the performance conditions at each reporting date until settlement. Compensation expense for PCAs is recognized over the applicable performance periods. The Company records a liability equal to the cost of PCAs for which achievement of the performance condition is deemed probable. As of March 31, 2020, the Company had recognized accrued liabilities of $46.5 thousand.
At March 31, 2020, there was $0.4 million of unrecognized PCA compensation cost. The unrecognized PCA compensation cost at March 31, 2020 is expected to be recognized over the weighted average period of 2.6 years. Total compensation expense for PCAs was $29.7 thousand and $46.5 thousand for the three and nine months ended March 31, 2020, respectively.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 14. Other Current Liabilities
Other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2020
|
|
June 30, 2019
|
Accrued postretirement benefits
|
|
$
|
890
|
|
|
$
|
1,068
|
|
Accrued workers’ compensation liabilities
|
|
1,702
|
|
|
1,495
|
|
Cumulative preferred dividends, undeclared and unpaid (4)
|
|
1,337
|
|
|
305
|
|
Earnout payable (1)
|
|
—
|
|
|
1,000
|
|
Working capital dispute payable(2)
|
|
354
|
|
|
354
|
|
Other (3)
|
|
2,193
|
|
|
3,087
|
|
Other current liabilities
|
|
$
|
6,476
|
|
|
$
|
7,309
|
|
___________
(1) Represents 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.
(2) Represents accrued expenses related to working capital disputes in connection with the Company's acquisition of Boyd Coffee on October 2, 2017.
(3) Includes accrued property taxes, sales and use taxes and insurance liabilities.
(4) Per the agreement, all the cumulative preferred dividends, undeclared and unpaid are now payable. Therefore, the previously accrued long-term portion has been reclassified to current liabilities.
Note 15. Other Long-Term Liabilities
Other long-term liabilities include the following:
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
March 31, 2020
|
|
June 30, 2019
|
Finance lease liabilities
|
|
$
|
22
|
|
|
$
|
32
|
|
Derivative liabilities—noncurrent
|
|
2,747
|
|
|
1,612
|
|
Performance Cash Awards Liability
|
|
46
|
|
|
—
|
|
Cumulative preferred dividends, undeclared and unpaid—noncurrent
|
|
—
|
|
|
618
|
|
Deferred income taxes and other liabilities(1)
|
|
1,738
|
|
|
1,795
|
|
Other long-term liabilities
|
|
$
|
4,553
|
|
|
$
|
4,057
|
|
___________
(1) Includes deferred tax liabilities that have an indefinite reversal pattern.
Note 16. Income Taxes
The income tax expense (benefit) and the related effective tax rates are as follows (in thousands, except effective tax rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Income tax (benefit) expense
|
|
$
|
(1,034
|
)
|
|
$
|
43,161
|
|
|
$
|
(1,222
|
)
|
|
$
|
39,149
|
|
Effective tax rate
|
|
2.5
|
%
|
|
(502.7
|
)%
|
|
4.3
|
%
|
|
(152.4
|
)%
|
The higher effective tax rate is primarily due to the previously recorded valuation allowance and change in the Company’s estimated deferred tax liability. The Company’s interim tax provision is determined using an estimated annual effective tax rate and adjusted for discrete taxable events that may occur during the quarter. The Company recognizes the effects of tax legislation in the period in which the law is enacted. Deferred tax assets and liabilities are remeasured using enacted tax rates expected to apply to taxable income in the years the Company estimates the related temporary differences to reverse. The Company evaluates its deferred tax assets quarterly to determine if a valuation allowance is required. In making such 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.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The Company files its tax returns as prescribed by the tax laws of the jurisdictions in which it operates. In the normal course of business, the Company is subject to examination by U.S. federal, state and local tax authorities. With limited exceptions, as of March 31, 2020 and June 30, 2019, the Company is no longer subject to income tax audits by taxing authorities for any years prior to 2016. Although the outcome of tax audits is always uncertain, the Company does not believe the outcome of any future audit will have a material adverse effect on the Company’s condensed consolidated financial statements.
Note 17. Net Income (loss) Per Common Share
Basic net income (loss) per common share is calculated by dividing net income (loss) attributable to the Company by the weighted average number of common shares outstanding during the periods presented. Diluted net income (loss) per common share is calculated by dividing diluted net income (loss) attributable to the Company by the weighted average number of common shares outstanding adjusted to include the effect, if dilutive, of the exercise of in-the-money stock options, unvested performance-based restricted stock units, and shares of Series A Preferred Stock, as converted, during the periods presented. The calculation of dilutive shares outstanding excludes out-of-the-money stock options (i.e., such option’s exercise prices were greater than the average market price of our common shares for the period) and unvested performance-based restricted stock units because their inclusion would be have been anti-dilutive.
The following table presents the computation of basic and diluted earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
(In thousands, except share and per share amounts)
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Undistributed net loss available to common stockholders
|
|
$
|
(39,790
|
)
|
|
$
|
(51,828
|
)
|
|
$
|
(27,692
|
)
|
|
$
|
(65,177
|
)
|
Undistributed net loss available to nonvested restricted stockholders and holders of convertible preferred stock
|
|
(126
|
)
|
|
(55
|
)
|
|
(91
|
)
|
|
(58
|
)
|
Net loss available to common stockholders—basic
|
|
$
|
(39,916
|
)
|
|
$
|
(51,883
|
)
|
|
$
|
(27,783
|
)
|
|
$
|
(65,235
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding—basic
|
|
17,230,879
|
|
|
17,003,206
|
|
|
17,161,477
|
|
|
16,982,247
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Shares issuable under stock options
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares issuable under PBRSUs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average common shares outstanding—diluted
|
|
17,230,879
|
|
|
17,003,206
|
|
|
17,161,477
|
|
|
16,982,247
|
|
Net loss per common share available to common stockholders—basic
|
|
$
|
(2.32
|
)
|
|
$
|
(3.05
|
)
|
|
$
|
(1.62
|
)
|
|
$
|
(3.84
|
)
|
Net loss per common share available to common stockholders—diluted
|
|
$
|
(2.32
|
)
|
|
$
|
(3.05
|
)
|
|
$
|
(1.62
|
)
|
|
$
|
(3.84
|
)
|
The following table summarizes anti-dilutive securities excluded from the computation of diluted net income (loss) per common share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
Nine Months Ended March 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Shares issuable under stock options
|
|
485,513
|
|
|
269,872
|
|
|
327,192
|
|
|
211,594
|
|
Shares issuable under convertible preferred stock
|
|
418,531
|
|
|
404,197
|
|
|
418,531
|
|
|
404,197
|
|
Shares issuable under PBRSUs
|
|
98,946
|
|
|
91,697
|
|
|
75,926
|
|
|
65,971
|
|
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 18. 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.
On October 2, 2017, the Company issued 14,700 shares of Series A Preferred Stock in connection with the Boyd Coffee acquisition. At March 31, 2020, 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
|
|
|
$
|
1,091
|
|
|
$
|
16,038
|
|
|
$
|
1,338
|
|
|
$
|
16,038
|
|
Note 19. Revenue Recognition
The Company’s primary sources of revenue are sales of coffee, tea and culinary products. The Company recognizes revenue when control of the promised good or service is transferred to the customer and in amounts that the Company expects to collect. The timing of revenue recognition takes into consideration the various shipping terms applicable to the Company’s sales.
The Company delivers products to customers primarily through two methods, Direct-store-delivery (“DSD”) to the Company’s customers at their place of business and direct ship from the Company’s warehouse to the customer’s warehouse or facility. Each delivery or shipment made to a third party customer is to satisfy a performance obligation. Performance obligations generally occur at a point in time and are satisfied when control of the goods passes to the customer. The Company is entitled to collection of the sales price under normal credit terms in the regions in which it operates.
The Company disaggregates net sales from contracts with customers based on the characteristics of the products sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2020
|
|
2019
|
(In thousands)
|
|
$
|
|
% of total
|
|
$
|
|
% of total
|
Net Sales by Product Category:
|
|
|
|
|
|
|
|
|
Coffee (Roasted)
|
|
$
|
84,300
|
|
|
65.3
|
%
|
|
$
|
93,211
|
|
|
63.5
|
%
|
Coffee (Frozen Liquid)
|
|
7,044
|
|
|
5.5
|
%
|
|
8,267
|
|
|
5.6
|
%
|
Tea (Iced & Hot)
|
|
6,701
|
|
|
5.2
|
%
|
|
8,320
|
|
|
5.7
|
%
|
Culinary
|
|
12,954
|
|
|
9.9
|
%
|
|
15,990
|
|
|
11.0
|
%
|
Spice
|
|
5,262
|
|
|
4.1
|
%
|
|
5,736
|
|
|
3.9
|
%
|
Other beverages(1)
|
|
12,290
|
|
|
9.5
|
%
|
|
14,405
|
|
|
9.8
|
%
|
Net sales by product category
|
|
128,551
|
|
|
99.5
|
%
|
|
145,929
|
|
|
99.5
|
%
|
Fuel surcharge
|
|
588
|
|
|
0.5
|
%
|
|
750
|
|
|
0.5
|
%
|
Net sales
|
|
$
|
129,139
|
|
|
100.0
|
%
|
|
$
|
146,679
|
|
|
100
|
%
|
____________
|
|
(1)
|
Includes all beverages other than roasted coffee, frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to drink cold brew and iced coffee.
|
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31,
|
|
|
2020
|
|
2019
|
(In thousands)
|
|
$
|
|
% of total
|
|
$
|
|
% of total
|
Net Sales by Product Category:
|
|
|
|
|
|
|
|
|
Coffee (Roasted)
|
|
$
|
267,847
|
|
|
63.7
|
%
|
|
$
|
287,851
|
|
|
63.4
|
%
|
Coffee (Frozen Liquid)
|
|
23,528
|
|
|
5.6
|
%
|
|
26,141
|
|
|
5.8
|
%
|
Tea (Iced & Hot)
|
|
21,969
|
|
|
5.2
|
%
|
|
25,876
|
|
|
5.7
|
%
|
Culinary
|
|
42,315
|
|
|
10.1
|
%
|
|
48,779
|
|
|
10.8
|
%
|
Spice
|
|
17,594
|
|
|
4.2
|
%
|
|
17,895
|
|
|
3.9
|
%
|
Other beverages(1)
|
|
42,322
|
|
|
10.1
|
%
|
|
44,946
|
|
|
9.9
|
%
|
Other revenues(2)
|
|
2,701
|
|
|
0.6
|
%
|
|
—
|
|
|
—
|
%
|
Net sales by product category
|
|
418,276
|
|
|
99.5
|
%
|
|
451,488
|
|
|
99.5
|
%
|
Fuel surcharge
|
|
1,961
|
|
|
0.5
|
%
|
|
2,404
|
|
|
0.5
|
%
|
Net sales
|
|
$
|
420,237
|
|
|
100.0
|
%
|
|
$
|
453,892
|
|
|
100.0
|
%
|
___________
|
|
(1)
|
Includes all beverages other than roasted coffee, frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to drink cold brew and iced coffee.
|
|
|
(2)
|
Represents revenues for certain transition services related to the sale of the Company’s office coffee assets.
|
The Company does not have any material contract assets and liabilities as of March 31, 2020. Receivables from contracts with customers are included in “Accounts receivable, net” on the Company’s condensed consolidated balance sheets. At March 31, 2020 and June 30, 2019, “Accounts receivable, net” included, $49.3 million and $53.6 million, respectively, in receivables from contracts with customers.
Note 20. Commitments and Contingencies
For a detailed discussion about the Company’s commitments and contingencies, see Note 22, “Commitments and Contingencies” in the Notes to Consolidated Financial Statements in the 2019 Form 10-K. During the nine months ended March 31, 2020, other than the following, or as otherwise disclosed in these footnotes in the current Form 10-Q, there were no material changes in the Company’s commitments and contingencies.
Purchase Commitments
As of March 31, 2020, the Company had committed to purchase green coffee inventory totaling $61.2 million under fixed-price contracts, $4.5 million in other inventory under non-cancelable purchase orders and $7.2 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, including 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 (“Prop 65”). The suit alleges that the defendants have failed to issue clear and reasonable warnings in accordance with Prop 65 that the coffee they produce, distribute, and sell contains acrylamide. This lawsuit was filed in Los Angeles Superior Court (the “Court”). CERT alleges that the Company and the other defendants failed to provide warnings for their coffee products of exposure to the chemical acrylamide as required under Prop 65. Plaintiff seeks equitable relief, including providing warnings to consumers of coffee products, as well as civil penalties in the amount of the statutory maximum of $2,500.00 per day per violation of Prop 65. The Plaintiff asserts that every consumed cup of coffee, absent a compliant warning, is equivalent to a violation under Prop 65.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
The Company, as part of a joint defense group (“JDG”) organized to defend against the lawsuit, disputes the claims of CERT. Acrylamide is not added to coffee but is present in all coffee in small amounts (parts per billion) as a byproduct of the coffee bean roasting process. 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 asserted multiple affirmative defenses. Trial of the first phase of the case commenced on September 8, 2014, and was limited to three affirmative defenses shared by all defendants. On September 1, 2015, the trial court issued a final ruling adverse to defendants on all Phase 1 defenses. Trial of the second phase of the case commenced in the fall of 2017. On May 7, 2018, the trial court issued a ruling adverse to defendants on the Phase 2 defense, the Company's last remaining defense to liability. On June 22, 2018, the California Office of Environmental Health Hazard Assessment (OEHHA) proposed a new regulation clarifying that cancer warnings are not required for coffee under Proposition 65. The case was set to proceed to a third phase trial on damages, remedies and attorneys' fees on October 15, 2018. However, on October 12, 2018, the California Court of Appeal granted the “defendants” request for a stay of the Phase 3 trial.
On June 3, 2019, the Office of Administrative Law (OAL) approved the coffee exemption regulation. The regulation became effective on October 1, 2019. On June 24, 2019, the Court of Appeal lifted the stay of the litigation. A status conference was held on July 11, 2019. The Court granted the JDG’s motion for leave to amend its answers to add the coffee exemption regulation as a defense. Concurrently, the Court denied CERT’s motion to add OEHHA as a party but granted CERT’s motions to complete the administrative record with respect to the exemption and to undertake certain third party discovery. A status conference was held November 12, 2019 to discuss discovery issues and dispositive motions. Plaintiff’s motion to compel OEHHA to add documents to the rulemaking file for the new coffee exemption regulation was denied. CERT continues to pursue third-party discovery with plans to file motions to compel appearances of proposed deponents. These motions, along with CERT’s eight summary judgment motions, were heard at a January 21, 2020 hearing where the Court denied several of CERT’s discovery requests. The JDG’s reply in support of its motion for summary judgment was due to the Court on the March 16, 2020. The Court delayed the March hearing on the motions until May 11, 2020 due to the COVID 19 pandemic’s impact and closure of courts. The parties’ reply papers are now due May 6.
Subsequent to the hearing on January 21, 2020, Plaintiff issued broad discovery against each of the defendants in hopes of opening up a third round of discovery. The discovery focuses on “additives to” and “flavorings” in coffee. The JDG is currently working to respond to those discovery requests.
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.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 21. Sales of Assets
Sale of Office Coffee Assets
In order to focus on its core product offerings, in July 2019, the Company completed the sale of certain assets associated with its office coffee customers for $9.3 million in cash paid at the time of closing plus an earnout of up to an additional $2.3 million if revenue expectations were achieved during test periods scheduled to occur at various branches at various times and concluded by early third quarter of fiscal year 2020. The earnout of up to an additional $2.3 million was not paid to the Company because the revenue expectations were not achieved. The Company recognized a net gain on the asset sales of $7.2 million during the nine months ended March 31, 2020. The sale of office coffee assets did not represent a strategic shift for the Company and did not have a material impact on the Company's results of operations because the Company has signed a supply agreement to provide certain coffee products to the assets purchaser.
Sale of Branch Properties
During the nine months ended March 31, 2020, the Company completed the sale of seven branch properties and entered into two operating lease agreements with the purchasers of two of the branch properties as detailed in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name of Branch Property
|
|
Date Sold
|
|
Sales Price
|
|
Net Proceed
|
|
Gain (loss)
|
|
Long-Term Leaseback
|
|
Lease Term
|
|
Monthly Base Rent
|
Seattle, Washington
|
|
8/28/2019
|
|
$
|
7,900
|
|
|
$
|
7,300
|
|
|
$
|
6,800
|
|
|
No
|
|
N/A
|
|
N/A
|
Indianapolis, Indiana
|
|
11/19/2019
|
|
$
|
250
|
|
|
$
|
186
|
|
|
$
|
(173
|
)
|
|
No
|
|
N/A
|
|
N/A
|
Hayward, California(1)
|
|
12/23/2019
|
|
$
|
7,050
|
|
|
$
|
6,569
|
|
|
$
|
2,016
|
|
|
Yes
|
|
5 years
|
|
$
|
28
|
|
Denver, Colorado(1)
|
|
12/31/2019
|
|
$
|
2,300
|
|
|
$
|
2,075
|
|
|
$
|
1,989
|
|
|
Yes
|
|
7 years
|
|
$
|
17
|
|
Casper, Wyoming
|
|
12/31/2019
|
|
$
|
385
|
|
|
$
|
355
|
|
|
$
|
304
|
|
|
No
|
|
N/A
|
|
N/A
|
Tempe, Arizona
|
|
1/28/2020
|
|
$
|
1,150
|
|
|
$
|
1,077
|
|
|
$
|
841
|
|
|
No
|
|
N/A
|
|
N/A
|
Great Falls, Montana
|
|
2/28/2020
|
|
$
|
385
|
|
|
$
|
356
|
|
|
$
|
283
|
|
|
No
|
|
N/A
|
|
N/A
|
___________
(1) Has an option to renew the lease for additional five years.
Sale leaseback of Houston Facility
In November 2019, the Company completed the sale of its Houston, Texas manufacturing facility and warehouse (the “Property”) for an aggregate purchase price, exclusive of closing costs, of $10.0 million. Cash proceeds from the sale of the Property were $9.0 million. The Company recognized a net gain on the Property sale of $7.3 million during the nine months ended March 31, 2020. The Property did not meet the accounting guidance criteria to be classified as discontinued operations.
Following the close of the sale of the Property, the Company and the purchaser of the Property entered into a three-year leaseback agreement with respect to the Property for a base rent of $50,000 per month. The Company may terminate the leaseback no earlier than the first day of the eighteenth full calendar month of the term providing at least nine months’ notice. The purchaser of the Property does not have any material relationship with the Company or its subsidiaries.
Farmer Bros. Co.
Notes to Unaudited Condensed Consolidated Financial Statements (continued)
Note 22. Subsequent Events
The Company evaluated all events or transactions that occurred after March 31, 2020 through the date the condensed consolidated financial statements were issued. During this period the Company had the following material subsequent events that require disclosure:
None.