0000034563-18-000011.txt : 20180207 0000034563-18-000011.hdr.sgml : 20180207 20180207171819 ACCESSION NUMBER: 0000034563-18-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 95 CONFORMED PERIOD OF REPORT: 20171231 FILED AS OF DATE: 20180207 DATE AS OF CHANGE: 20180207 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FARMER BROTHERS CO CENTRAL INDEX KEY: 0000034563 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FOOD PREPARATIONS & KINDRED PRODUCTS [2090] IRS NUMBER: 950725980 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-34249 FILM NUMBER: 18581967 BUSINESS ADDRESS: STREET 1: 1912 FARMER BROTHERS DRIVE CITY: NORTHLAKE STATE: TX ZIP: 76262 BUSINESS PHONE: 888 998 2468 MAIL ADDRESS: STREET 1: P O BOX 77057 CITY: FORT WORTH STATE: TX ZIP: 76177 10-Q 1 farm-20171231x10q.htm 10-Q FARM-2017.12.31-10Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number: 001-34249
FARMER BROS. CO.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
95-0725980
(State of Incorporation)
 
(I.R.S. Employer Identification No.)
1912 Farmer Brothers Drive, Northlake, Texas 76262
(Address of Principal Executive Offices; Zip Code)
 
888-998-2468
(Registrant’s Telephone Number, Including Area Code)
 
None
(Former Address, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ý    NO  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. 
Large accelerated filer
¨
 
  
Accelerated filer
 
ý
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
 
 
Exchange Act.
¨
 
 
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
YES ¨ NO  ý
As of February 6, 2018, the registrant had 16,899,667 shares outstanding of its common stock, par value $1.00 per share, which is the registrant’s only class of common stock.



TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






PART I - FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
FARMER BROS. CO.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share data)
 
December 31, 2017
 
June 30, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
5,414

 
$
6,241

Short-term investments

 
368

Accounts receivable, net
62,275

 
46,446

Inventories
73,284

 
56,251

Income tax receivable
206

 
318

Prepaid expenses
9,176

 
7,540

Total current assets
150,355

 
117,164

Property, plant and equipment, net
178,148

 
176,066

Goodwill
21,861

 
10,996

Intangible assets, net
51,036

 
18,618

Other assets
7,263

 
6,837

Deferred income taxes
45,593

 
63,055

Total assets
$
454,256

 
$
392,736

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
51,218

 
39,784

Accrued payroll expenses
17,286

 
17,345

Short-term borrowings under revolving credit facility
84,430

 
27,621

Short-term obligations under capital leases
488

 
958

Short-term derivative liabilities
1,649

 
1,857

Other current liabilities
10,991

 
9,702

Total current liabilities
166,062

 
97,267

Accrued pension liabilities
50,505

 
51,281

Accrued postretirement benefits
19,112

 
19,788

Accrued workers’ compensation liabilities
6,365

 
7,548

Other long-term liabilities-capital leases
116

 
237

Other long-term liabilities
2,156

 
1,480

Total liabilities
$
244,316

 
$
177,601

Commitments and contingencies (Note 21)

 

Stockholders’ equity:
 
 
 
Preferred stock, $1.00 par value, 500,000 shares authorized; Series A Convertible Participating Cumulative Perpetual Preferred Stock, 21,000 shares authorized; 14,700 and zero shares issued and outstanding at December 31, 2017 and June 30, 2017, respectively; liquidation preference of $38.32 at December 31, 2017
15

 

Common stock, $1.00 par value, 25,000,000 shares authorized; 16,899,667 and 16,846,002 shares issued and outstanding at December 31, 2017 and June 30, 2017, respectively
16,900

 
16,846

Additional paid-in capital
53,322

 
41,495

Retained earnings
203,289

 
221,182

Unearned ESOP shares
(2,145
)
 
(4,289
)
Accumulated other comprehensive loss
(61,441
)
 
(60,099
)
Total stockholders’ equity
$
209,940

 
$
215,135

Total liabilities and stockholders’ equity
$
454,256

 
$
392,736

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

1



FARMER BROS. CO.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except share and per share data)
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
2017
 
2016
 
2017
 
2016
Net sales
$
167,366

 
$
139,025

 
$
299,079

 
$
269,513

Cost of goods sold
101,847

 
83,929

 
184,553

 
163,219

Gross profit
65,519

 
55,096

 
114,526

 
106,294

Selling expenses
49,328

 
39,097

 
88,243

 
77,535

General and administrative expenses
13,914

 
13,793

 
25,241

 
22,729

Restructuring and other transition expenses
139

 
3,965

 
259

 
6,995

Net gain from sale of Torrance Facility

 
(37,449
)
 

 
(37,449
)
Net gains from sale of spice assets
(395
)
 
(334
)
 
(545
)
 
(492
)
Net losses (gains) from sales of other assets
91

 
114

 
144

 
(1,439
)
Operating expenses
63,077

 
19,186

 
113,342

 
67,879

Income from operations
2,442

 
35,910

 
1,184

 
38,415

Other (expense) income:
 
 
 
 
 
 
 
Dividend income
6

 
270

 
11

 
535

Interest income
1

 
159

 
2

 
288

Interest expense
(861
)
 
(524
)
 
(1,384
)
 
(913
)
Other, net
554

 
(2,323
)
 
641

 
(2,132
)
Total other expense
(300
)
 
(2,418
)
 
(730
)
 
(2,222
)
Income before taxes
2,142

 
33,492

 
454

 
36,193

Income tax expense
20,910

 
13,416

 
20,200

 
14,499

Net (loss) income
$
(18,768
)
 
$
20,076

 
$
(19,746
)
 
$
21,694

Less: Cumulative preferred dividends, undeclared and unpaid
129

 

 
129

 

Net (loss) income available to common stockholders
$
(18,897
)
 
$
20,076

 
$
(19,875
)
 
$
21,694

Net (loss) income per common share available to common stockholders—basic
$
(1.13
)
 
$
1.21

 
$
(1.19
)
 
$
1.31

Net (loss) income per common share available to common stockholders—diluted
$
(1.13
)
 
$
1.20

 
$
(1.19
)
 
$
1.30

Weighted average common shares outstanding—basic
16,723,498

 
16,584,106

 
16,711,660

 
16,573,545

Weighted average common shares outstanding—diluted
16,723,498

 
16,707,003

 
16,711,660

 
16,695,687


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


2



FARMER BROS. CO.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(In thousands)
 
Three Months Ended
 December 31,
 
Six Months Ended
 December 31,
 
2017
 
2016
 
2017
 
2016
Net (loss) income
$
(18,768
)
 
$
20,076

 
$
(19,746
)
 
$
21,694

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Unrealized losses on derivative instruments designated as cash flow hedges, net of tax
(1,279
)
 
(1,800
)
 
(1,711
)
 
(1,356
)
Losses (gains) on derivative instruments designated as cash flow hedges reclassified to cost of goods sold, net of tax
365

 
(132
)
 
369

 
153

Total comprehensive (loss) income, net of tax
$
(19,682
)
 
$
18,144

 
$
(21,088
)
 
$
20,491


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




3



 
FARMER BROS. CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Six Months Ended December 31,
 
2017
 
2016
Cash flows from operating activities:
 
 
 
Net (loss) income
$
(19,746
)
 
$
21,694

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 
 
Depreciation and amortization
15,330

 
10,086

Provision for (recovery of) doubtful accounts
129

 
(44
)
Interest on sale-leaseback financing obligation

 
681

Restructuring and other transition expenses, net of payments
(958
)
 
1,082

Deferred income taxes
19,375

 
13,640

Net gain from sale of Torrance Facility

 
(37,449
)
Net gains from sales of spice assets and other assets
(401
)
 
(1,931
)
ESOP and share-based compensation expense
1,844

 
2,094

Net losses on derivative instruments and investments
1,033

 
2,583

Change in operating assets and liabilities:
 
 
 
Purchases of trading securities

 
(2,959
)
Proceeds from sales of trading securities
375

 
1,268

Accounts receivable
(8,102
)
 
(4,545
)
Inventories
(7,682
)
 
(10,071
)
Income tax receivable
112

 
(27
)
Derivative assets (liabilities), net
(3,000
)
 
4,329

Prepaid expenses and other assets
352

 
33

Accounts payable
1,264

 
18,356

Accrued payroll expenses and other current liabilities
1,178

 
(5,210
)
Accrued postretirement benefits
(676
)
 
(447
)
Other long-term liabilities
(1,960
)
 
(1,849
)
Net cash (used in) provided by operating activities
$
(1,533
)
 
$
11,314

Cash flows from investing activities:
 
 
 
Acquisition of businesses, net of cash acquired
$
(39,608
)
 
$
(11,183
)
Purchases of property, plant and equipment
(14,672
)
 
(26,864
)
Purchases of assets for construction of New Facility
(1,577
)
 
(21,783
)
Proceeds from sales of property, plant and equipment
85

 
3,332

Net cash used in investing activities
$
(55,772
)
 
$
(56,498
)
(continued on next page)

4



FARMER BROS. CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Six Months Ended December 31,
 
2017
 
2016
Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility
$
69,758

 
$
34,323

Repayments on revolving credit facility
(12,949
)
 
(15,900
)
Proceeds from sale-leaseback financing obligation

 
42,455

Proceeds from New Facility lease financing obligation

 
7,662

Repayments of New Facility lease financing obligation

 
(35,772
)
Payments of capital lease obligations
(591
)
 
(641
)
Payment of financing costs
(365
)
 

Proceeds from stock option exercises
625

 
405

Net cash provided by financing activities
$
56,478

 
$
32,532

Net decrease in cash and cash equivalents
$
(827
)
 
$
(12,652
)
Cash and cash equivalents at beginning of period
6,241

 
21,095

Cash and cash equivalents at end of period
$
5,414

 
$
8,443

Supplemental disclosure of non-cash investing and financing activities:
 
 
 
        Net change in derivative assets and liabilities
           included in other comprehensive (loss) income, net of tax
$
(1,342
)
 
$
(1,203
)
    Non-cash additions to property, plant and equipment
$
557

 
$
11,253

    Non-cash portion of earnout receivable recognized—spice assets sale
$
545

 
$
492

    Non-cash portion of earnout payable recognized—China Mist acquisition
$

 
$
500

    Non-cash receivable from West Coast Coffee—post-closing final working capital adjustment
$
218

 
$

    Non-cash consideration given—Issuance of Series A Preferred Stock
$
11,756

 
$

    Non-cash Multiemployer Plan Holdback payable recognized—Boyd Coffee acquisition
$
1,056

 
$

    Cumulative preferred dividends, undeclared and unpaid
$
129

 
$


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


5




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

Note 1. Introduction and Basis of Presentation
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company”), is a national coffee roaster, wholesaler and distributor of coffee, tea, and culinary products.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete consolidated financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals, unless otherwise indicated) considered necessary for a fair presentation of the interim financial data have been included. Operating results for the three and six months ended December 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2018. Events occurring subsequent to December 31, 2017 have been evaluated for potential recognition or disclosure in the unaudited condensed consolidated financial statements for the three and six months ended December 31, 2017.
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, 2017, filed with the Securities and Exchange Commission (the “SEC”) on September 28, 2017 (the “2017 Form 10-K”).
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its direct and indirect wholly owned subsidiaries FBC Finance Company, a California corporation, Coffee Bean Holding Co., Inc., a Delaware corporation, the parent company of Coffee Bean International, Inc., an Oregon corporation (“CBI”), CBI, China Mist Brands, Inc., a Delaware corporation, and Boyd Assets Co., a Delaware corporation. All inter-company balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company reviews its estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates and actual results may differ from those estimates.

Note 2. Summary of Significant Accounting Policies
For a detailed discussion about the Company’s significant accounting policies, see Note 2, “Summary of Significant Accounting Policies” to the consolidated financial statements in the 2017 Form 10-K.
During the three and six months ended December 31, 2017, other than as set forth below and the adoption of Accounting Standards Update (“ASU”) No. 2017-12, “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”), ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”), and ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory” (“ASU 2015-11”), there were no significant updates made to the Company’s significant accounting policies.
Coffee Brewing Equipment and Service
The Company classifies certain expenses related to coffee brewing equipment provided to customers as cost of goods sold. These costs include the cost of the equipment as well as the cost of servicing that equipment (including service

6


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


employees’ salaries, cost of transportation and the cost of supplies and parts) and are considered directly attributable to the generation of revenues from its customers. Accordingly, such costs included in cost of goods sold in the accompanying unaudited condensed consolidated financial statements in the three months ended December 31, 2017 and 2016 were $7.1 million and $5.8 million, respectively. Coffee brewing equipment costs included in cost of goods sold in the six months ended December 31, 2017 and 2016 were $13.5 million and $12.3 million, respectively.
The Company capitalizes coffee brewing equipment and depreciates it over five years and reports the depreciation expense in cost of goods sold. Such depreciation expense related to capitalized coffee brewing equipment reported in cost of goods sold in the three months ended December 31, 2017 and 2016 was $2.3 million and $2.1 million, respectively, and $4.4 million and $4.5 million, respectively, in the six months ended December 31, 2017 and 2016. The Company capitalized coffee brewing equipment (included in machinery and equipment) in the amounts of $4.8 million and $5.9 million in the six months ended December 31, 2017 and 2016, respectively.
Net (Loss) Income Per Common Share
Net (loss) income per share (“EPS”) represents net (loss) income available to common stockholders divided by the weighted-average number of common shares outstanding for the period, excluding unallocated shares held by the Company's Employee Stock Ownership Plan (“ESOP”). Dividends on the Company’s outstanding Series A Convertible Participating Cumulative Perpetual Preferred Stock, par value $1.00 per share (“Series A Preferred Stock”), that the Company has paid or intends to pay are deducted from net (loss) income in computing net (loss) income available to common stockholders.
Under the two-class method, net (loss) income available to nonvested restricted stockholders and holders of Series A Preferred Stock is excluded from net (loss) income available to common stockholders for purposes of calculating basic and diluted EPS.
Diluted EPS represents net income available to holders of common stock divided by the weighted-average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period. Common equivalent shares include potentially dilutive shares from share-based compensation including stock options, unvested restricted stock, performance-based restricted stock units, and shares of Series A Preferred Stock, as converted, because they are deemed participating securities. In the absence of contrary information, the Company assumes 100% of the target shares are issuable under performance-based restricted stock units.
The dilutive effect of Series A Preferred Stock is reflected in diluted EPS by application of the if-converted method. In applying the if-converted method, conversion will not be assumed for purposes of computing diluted EPS if the effect would be anti-dilutive. The Series A Preferred Stock is anti-dilutive whenever the amount of the dividend declared or accumulated in the current period per common share obtainable upon conversion exceeds basic EPS. See Note 19.
Impairment of Goodwill and Indefinite-lived Intangible Assets

Historically, the Company performed its annual assessment of impairment of goodwill and indefinite-lived intangible assets as of June 30.  During the three months ended December 31, 2017, the Company voluntarily changed its annual impairment assessment date from June 30 to January 31.  The Company believes this change in assessment date, which represents a change in the method of applying an accounting principle, is preferred under the circumstances.  Due to recent acquisitions, the Company’s goodwill and indefinite-lived intangible asset balances have increased. The Company believes the change in measurement date will provide additional time to complete the annual assessment of impairment of goodwill and indefinite-lived intangible assets in advance of year-end reporting.

Shipping and Handling Costs
Shipping and handling costs incurred through outside carriers are recorded as a component of the Company’s selling expenses and were $6.9 million and $6.4 million, respectively, in the three months ended December 31, 2017 and 2016, and $12.1 million and $11.2 million, respectively, in the six months ended December 31, 2017 and 2016.
Share-based Compensation
The Company measures all share-based compensation cost at the grant date, based on the fair values of the awards that are ultimately expected to vest, and recognizes that cost as an expense on a straight line-basis in its consolidated statements of operations over the requisite service period. Fair value of restricted stock and performance-based restricted stock units is

7


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


the closing price of the Company's common stock on the date of grant. The Company estimates the fair value of option awards using the Black-Scholes option valuation model, which requires management to make certain assumptions for estimating the fair value of stock options at the date of grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management’s opinion, the existing models may not necessarily provide a reliable single measure of the fair value of the Company’s stock options. Although the fair value of stock options is determined using an option valuation model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
In addition, the Company estimates the expected impact of forfeited awards and recognizes share-based compensation cost only for those awards ultimately expected to vest. If actual forfeiture rates differ materially from the Company’s estimates, share-based compensation expense could differ significantly from the amounts the Company has recorded in the current period. The Company periodically reviews actual forfeiture experience and will revise its estimates, as necessary. The Company will recognize as compensation cost the cumulative effect of the change in estimated forfeiture rates on current and prior periods in earnings of the period of revision. As a result, if the Company revises its assumptions and estimates, the Company’s share-based compensation expense could change materially in the future.
The Company’s outstanding share-based awards include performance-based non-qualified stock options (“PNQs”) and performance-based restricted stock units (“PBRSUs”) that have performance-based vesting conditions in addition to time-based vesting. Awards with performance-based vesting conditions require the achievement of certain financial and other performance criteria as a condition to the vesting. The Company recognizes the estimated fair value of performance-based awards, net of estimated forfeitures, as share-based compensation expense over the service period based upon the Company’s determination of whether it is probable that the performance targets will be achieved. At each reporting period, the Company reassesses the probability of achieving the performance criteria and the performance period required to meet those targets. Determining whether the performance criteria will be achieved involves judgment, and the estimate of share-based compensation expense may be revised periodically based on changes in the probability of achieving the performance criteria. Revisions are reflected in the period in which the estimate is changed. If performance goals are not met, no share-based compensation expense is recognized for the cancelled PNQs or PBRSUs, and, to the extent share-based compensation expense was previously recognized for those cancelled PNQs or PBRSUs, such share-based compensation expense is reversed. If performance goals are exceeded and the payout is more than 100% of the target shares, additional compensation expense is recorded in the period when that determination is certified by the Compensation Committee of the Board of Directors. See Note 16.
Recently Adopted Accounting Standards
In August 2017, the Financial Accounting Standards Board (“FASB”) issued ASU 2017-12. ASU 2017-12 amends the hedge accounting model in Accounting Standards Codification (“ASC”) 815 to enable entities to better portray the economics of their risk management activities in the financial statements and enhance the transparency and understandability of hedge results. ASU 2017-12 expands an entity’s ability to hedge non-financial and financial risk components and reduce complexity in fair value hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. The guidance in ASU 2017-12 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, and is effective for the Company beginning July 1, 2019. Early adoption is permitted in any interim period or fiscal year before the effective date. For cash flow and net investment hedges existing at the date of adoption, entities will apply the new guidance using a modified retrospective approach (i.e., with a cumulative effect adjustment recorded to the opening balance of retained earnings as of the initial application date). The guidance provides transition relief to make it easier for entities to apply certain amendments to existing hedges (including fair value hedges) where the hedge documentation needs to be modified. The Company early adopted ASU 2017-12 as of September 30, 2017 for its cash flow hedges related to coffee commodity purchases. Adoption of ASU 2017-12 resulted in a cumulative adjustment of $0.3 million to the opening balance of retained earnings. Adoption of ASU 2017-12 did not have any other material effect on the results of operations, financial position or cash flows of the Company.
In March 2016, the FASB issued ASU 2016-09. ASU 2016-09 was issued as part of the FASB’s Simplification Initiative. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification

8


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


on the statement of cash flows. ASU 2016-09 requires that the tax impact related to the difference between share-based compensation for book and tax purposes be recognized as income tax benefit or expense in the reporting period in which such awards vest. ASU 2016-09 also required a modified retrospective adoption for previously unrecognized excess tax benefits. The guidance in ASU 2016-09 is effective for public business entities for annual periods beginning after  December 15, 2016, including interim periods within those annual reporting periods. The Company adopted ASU 2016-09 beginning July 1, 2017 on a modified retrospective basis, recognizing all excess tax benefits previously unrecognized, as a cumulative-effect adjustment increasing deferred tax assets by $1.6 million and increasing retained earnings by the same amount as of July 1, 2017. Adoption of ASU 2016-09 did not have any other material effect on the results of operations, financial position or cash flows of the Company.
In July 2015, the FASB issued ASU 2015-11. ASU 2015-11 simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Entities will continue to apply their existing impairment models to inventories that are accounted for using last-in first-out or LIFO and the retail inventory method or RIM. Under current guidance, net realizable value is one of several calculations an entity needs to make to measure inventory at the lower of cost or market. ASU 2015-11 is effective for public business entities for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, and the guidance must be applied prospectively after the date of adoption. The Company adopted ASU 2015-11 beginning July 1, 2017. Adoption of ASU 2015-11 did not have a material effect on the results of operations, financial position or cash flows of the Company.
New Accounting Pronouncements
In March 2017, the FASB issued ASU No. 2017-07, “Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”). ASU 2017-07 amends the requirements in GAAP related to the income statement presentation of the components of net periodic benefit cost for an entity’s sponsored defined benefit pension and other postretirement plans. ASU 2017-07 changes the income statement presentation of defined benefit plan expense by requiring separation between operating expense (service cost component) and non-operating expense (all other components, including interest cost, amortization of prior service cost, curtailments and settlements, etc.). The operating expense component is reported with similar compensation costs while the non-operating expense components are reported in other income and expense. In addition, only the service cost component is eligible for capitalization as part of an asset such as inventory or property, plant and equipment. The guidance in ASU 2017-07 is effective for annual periods beginning after December 15, 2017, including interim periods within those fiscal years, and is effective for the Company beginning July 1, 2018. Because the expected operating expense component and non-operating expense components of net periodic benefit cost are not material to the consolidated financial statements of the Company, adoption of ASU 2017-07 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). The amendments in ASU 2017-04 address concerns regarding the cost and complexity of the two-step goodwill impairment test, and remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. ASU 2017-04 does not amend the optional qualitative assessment of goodwill impairment. The guidance in ASU 2017-04 is effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019, and is effective for the Company beginning July 1, 2020. Adoption of ASU 2017-04 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). The amendments in ASU 2017-01 clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of businesses and provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”) is not a business. If the screen is not met, the amendments (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace the missing elements. The guidance in ASU 2017-01 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted in certain circumstances. ASU 2017-01 is effective for the Company beginning July 1, 2018. Adoption of ASU 2017-01 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.

9


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


In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As a result, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The amendments do not provide a definition of restricted cash or restricted cash equivalents. The guidance in ASU 2016-18 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted in certain circumstances. ASU 2016-18 is effective for the Company beginning July 1, 2018. Adoption of ASU 2016-18 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU 2016-15”). ASU 2016-15 addresses certain issues where diversity in practice was identified in classifying certain cash receipts and cash payments based on the guidance in ASC 230. ASC 230 is principles based and often requires judgment to determine the appropriate classification of cash flows as operating, investing or financing activities. The application of judgment has resulted in diversity in how certain cash receipts and cash payments are classified. Certain cash receipts and cash payments may have aspects of more than one class of cash flows. ASU 2016-15 clarifies that an entity will first apply any relevant guidance in ASC 230 and in other applicable topics. If there is no guidance that addresses those cash receipts and cash payments, an entity will determine each separately identifiable source or use and classify the receipt or payment based on the nature of the cash flow. If a receipt or payment has aspects of more than one class of cash flows and cannot be separated, classification will depend on the predominant source or use. The guidance in ASU 2016-15 is effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted in certain circumstances. ASU 2016-15 is effective for the Company beginning July 1, 2018. Adoption of ASU 2016-15 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which introduces a new lessee model that brings substantially all leases onto the balance sheet. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments and a related right-of-use asset. For public business entities, ASU 2016-02 is effective for financial statements issued for annual periods beginning after December 15, 2018, and interim periods within those annual periods. Early application is permitted. ASU 2016-02 is effective for the Company beginning July 1, 2019. The Company is evaluating the impact this guidance will have on its consolidated financial statements and expects the adoption will have a significant impact on the Company’s financial position resulting from the increase in assets and liabilities.
In May 2014, the FASB issued accounting guidance which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers under ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”). ASU 2014-09 will replace most existing revenue recognition guidance in GAAP when it becomes effective. On August 12, 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 by one year allowing early adoption as of the original effective date of January 1, 2017. The deferral results in the new accounting standard being effective for public business entities for annual reporting periods beginning after December 31, 2017, including interim periods within those fiscal years. ASU 2014-09 is effective for the Company beginning July 1, 2018. The Company is in the process of evaluating the provisions of ASU 2014-09 and assessing its impact on the Company’s financial statements, information systems, business processes, and financial statement disclosures. The Company has analyzed its revenue streams and is in the process of performing detailed contract reviews for each stream, and evaluating the impact ASU 2014-09 may have on revenue recognition. The Company primarily recognizes revenue at point of sale or delivery and does not expect that this will change under the new standard. Based on its preliminary reviews, the Company does not expect that the adoption of ASU 2014-09 will have a material impact on its consolidated financial statements; however, the Company’s assessment of contracts related to recent acquisitions is still in process. At a minimum, the Company anticipates expanded disclosures related to revenue in order to comply with ASU 2014-09. The Company will continue to evaluate the impact of the adoption of ASU 2014-09. Preliminary assessments made by the Company are subject to change. The Company has not yet concluded which transition method it will elect but will determine the transition method in the third quarter of fiscal 2018.

10


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


Note 3. Acquisitions
China Mist Brands, Inc.
On October 11, 2016, the Company, through a wholly owned subsidiary, acquired substantially all of the assets and certain specified liabilities of China Mist Brands, Inc. dba China Mist Tea Company (“China Mist”), a provider of flavored and unflavored iced and hot teas. As part of the transaction, the Company assumed the lease on China Mist’s existing 17,400 square foot distribution and warehouse facility in Scottsdale, Arizona which is terminable upon twelve months’ notice.
The Company acquired China Mist for aggregate purchase consideration of $12.2 million, consisting of $11.2 million in cash paid at closing including estimated working capital adjustments of $0.4 million, post-closing final working capital adjustments of $0.6 million, and up to $0.5 million in contingent consideration to be paid as earnout if certain sales levels are achieved in the calendar years of 2017 or 2018. This contingent earnout liability is estimated to have a fair value of $0.5 million as of the closing date and is recorded in other long-term liabilities on the Company’s Condensed Consolidated Balance Sheet at December 31, 2017 and June 30, 2017. The earnout is estimated to be paid in calendar 2019.
The financial effect of this acquisition was not material to the Company’s condensed consolidated financial statements. The Company has not presented pro forma results of operations for the acquisition because it is not significant to the Company’s consolidated results of operations.
The acquisition was accounted for as a business combination. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The purchase price allocation is final.
The following table summarizes the final allocation of consideration transferred as of the acquisition date:
(In thousands)
Fair Value
 
Estimated
Useful Life
(years)
 
 
 
 
Cash paid, net of cash acquired
$
11,183

 
 
Post-closing final working capital adjustments
553

 
 
Contingent consideration
500

 
 
Total consideration
$
12,236

 
 
 
 
 
 
Accounts receivable
$
811

 
 
Inventory
544

 
 
Prepaid assets
48

 
 
Property, plant and equipment
189

 
 
Goodwill
2,927

 
 
Intangible assets:
 
 
 
  Recipes
930

 
7
  Non-compete agreement
100

 
5
  Customer relationships
2,000

 
10
  Trade name/Trademark—indefinite-lived
5,070

 
 
Accounts payable
(383
)
 
 
  Total consideration, net of cash acquired
$
12,236

 
 

In connection with this acquisition, the Company recorded goodwill of $2.9 million, which is deductible for tax purposes. The Company also recorded $3.0 million in finite-lived intangible assets that included recipes, a non-compete agreement and customer relationships and $5.1 million in indefinite-lived trade name/trademark. The weighted average amortization period for the finite-lived intangible assets is 8.9 years. See Note 13.

11


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


The determination of the fair value of intangible assets acquired was primarily based on significant inputs not observable in an active market and thus represent Level 3 fair value measurements as defined under GAAP.
The fair value assigned to the recipes was determined utilizing the replacement cost method, which captures the direct cost of the development effort plus lost profits over the time to re-create the recipes.
The fair value assigned to the non-compete agreement was determined utilizing the with and without method. Under the with and without method, the fair value of the intangible asset is estimated based on the difference in projected earnings with the agreement in place versus projected earnings based on starting with no agreement in place. Revenue and earnings projections were significant inputs into estimating the value of China Mist’s non-compete agreement.
The fair value assigned to the customer relationships was determined based on management’s estimate of the retention rate utilizing certain benchmarks. Revenue and earnings projections were also significant inputs into estimating the value of customer relationships.
The fair value assigned to the trade name/trademark was determined utilizing a multi-period excess earnings approach. Under the multi-period excess earnings approach, the fair value of the intangible asset is estimated to be the present value of future earnings attributable to the asset and this method utilizes revenue and cost projections including an assumed contributory asset charge.
West Coast Coffee Company, Inc.
On February 7, 2017, the Company acquired substantially all of the assets and certain specified liabilities of West Coast Coffee Company, Inc. (“West Coast Coffee”), a coffee roaster and distributor with a focus on the convenience store, grocery and foodservice channels. As part of the transaction, the Company entered into a three-year lease on West Coast Coffee’s existing 20,400 square foot production, distribution and warehouse facility in Hillsboro, Oregon, which expires January 31, 2020, and assumed leases on six branch warehouses consisting of an aggregate of 24,150 square feet in Oregon, California and Nevada, expiring on various dates through November 2020. The Company acquired West Coast Coffee for aggregate purchase consideration of $15.5 million, which included $14.7 million in cash paid at closing including working capital adjustments of $1.2 million, post-closing final working capital adjustments of $(0.2) million, and up to $1.0 million in contingent consideration to be paid as earnout if certain sales levels are achieved in the twenty-four months following the closing. This contingent earnout liability is estimated to have a fair value of $0.6 million as of the closing date and is recorded in other long-term liabilities on the Company’s Condensed Consolidated Balance Sheet at December 31, 2017 and June 30, 2017. The earnout is estimated to be paid within twenty-four months following the closing.
The financial effect of this acquisition was not material to the Company’s condensed consolidated financial statements. The Company has not presented pro forma results of operations for the acquisition because it is not significant to the Company’s consolidated results of operations.
The acquisition was accounted for as a business combination. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The purchase price allocation is final.

12


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


The following table summarizes the final allocation of consideration transferred as of the acquisition date:
(In thousands)
Fair Value
 
Estimated Useful Life (years)
 
 
 
 
Cash paid, net of cash acquired
$
14,671

 
 
Post-closing final working capital adjustments
(218
)
 
 
Fair value of contingent consideration
600

 
 
Total consideration
$
15,053

 
 
 
 
 
 
Accounts receivable
$
956

 
 
Inventory
910

 
 
Prepaid assets
16

 
 
Property, plant and equipment
1,546

 
 
Goodwill
7,630

 
 
Intangible assets:
 
 
 
  Non-compete agreements
100

 
5
  Customer relationships
4,400

 
10
  Trade name—finite-lived
260

 
7
  Brand name—finite-lived
250

 
1.7
Accounts payable
(833
)
 
 
Other liabilities
(182
)
 
 
  Total consideration, net of cash acquired
$
15,053

 
 

In connection with this acquisition, the Company recorded goodwill of $7.6 million, which is deductible for tax purposes. The Company also recorded $5.0 million in finite-lived intangible assets that included non-compete agreements, customer relationships, a trade name and a brand name. The weighted average amortization period for the finite-lived intangible assets is 9.3 years. See Note 13.
The determination of the fair value of intangible assets acquired was primarily based on significant inputs not observable in an active market and thus represent Level 3 fair value measurements as defined under GAAP.
The fair value assigned to the non-compete agreements was determined utilizing the with and without method. Under the with and without method, the fair value of the intangible asset is estimated based on the difference in projected earnings with the agreements in place versus projected earnings based on starting with no agreements in place. Revenue and earnings projections were significant inputs into estimating the value of West Coast Coffee’s non-compete agreements.
The fair value assigned to the customer relationships was determined utilizing a multi-period excess earnings approach. Under the multi-period excess earnings approach, the fair value of the intangible asset is estimated to be the present value of future earnings attributable to the asset and this method utilizes revenue and cost projections including an assumed contributory asset charge.
The fair values assigned to the trade name and the brand name were determined utilizing the relief from royalty method. The relief from royalty method is based on the premise that the intangible asset owner would be willing to pay a royalty rate to license the subject asset. The analysis involves forecasting revenue over the life of the asset, applying a royalty rate and a tax rate, and then discounting the savings back to present value at an appropriate discount rate.

Boyd Coffee Company
On October 2, 2017 (“Closing Date”), the Company, through a wholly owned subsidiary, acquired substantially all of the assets and certain specified liabilities of Boyd Coffee Company (“Boyd Coffee” or “Seller”), a coffee roaster and distributor with a focus on restaurants, hotels, and convenience stores on the West Coast of the United States. The acquired business of Boyd Coffee (the “Boyd Business”) is expected to add to the Company’s product portfolio, improve growth potential, increase the density and penetration of the Company’s distribution footprint, and increase capacity utilization at

13


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


the Company’s production facilities.

At closing, as consideration for the purchase, the Company paid the Seller $38.9 million in cash from borrowings under its senior secured revolving credit facility (see Note 15), and issued to Boyd Coffee 14,700 shares of the Company’s Series A Preferred Stock, with a fair value of $11.8 million as of the Closing Date. Additionally, the Company held back $3.2 million in cash (“Holdback Cash Amount”) and 6,300 shares of Series A Preferred Stock (“Holdback Stock”) with a fair value of $4.8 million as of the Closing Date, for the satisfaction of any post-closing working capital adjustment and to secure the Seller’s (and the other seller parties’) indemnification obligations under the purchase agreement. Any Holdback Cash Amount and Holdback Stock not used to satisfy indemnification claims (including pending claims) will be released to the Seller on the 18-month anniversary of the Closing Date.

In addition to the Holdback Cash, as part of the consideration for the purchase, at closing the Company held back $1.1 million in cash (the “Multiemployer Plan Holdback”) to pay, on behalf of the Seller, any assessment of withdrawal liability made against the Seller following the Closing Date in respect of the Seller’s multiemployer plans. As the Company has not made this payment as of December 31, 2017 and expects settling the pension liability will take greater than twelve months, the Multiemployer Plan Holdback is recorded in other long-term liabilities on the Company’s Condensed Consolidated Balance Sheet at December 31, 2017. See Note 17.

The parties are in the process of determining the final net working capital under the purchase agreement. At December 31, 2017, the Company estimated a net working capital adjustment of $(8.1) million, which is reflected in the preliminary purchase price allocation set forth below.  

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


 
Holdback Cash Amount
3,150

 
 
Multiemployer Plan Holdback
1,056

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

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

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

 
 
 
 
 
 
Accounts receivable
$
7,166

 
 
Inventory
9,415

 
 
Prepaid expense and other assets
1,951

 
 
Property, plant and equipment
4,936

 
 
Goodwill
11,032

 
 
Intangible assets:
 
 
 
  Customer relationships
31,000

 
10
  Trade name/trademark—indefinite-lived
2,800

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

 
 
______________
(1) Fair value of Series A Preferred Stock and Holdback Stock as of the Closing Date, estimated as the sum of (a) the present value of the dividends payable thereon and (b) the stated value of the Series A Preferred Stock or Holdback Stock, as the case may be, adjusted for both the conversion premium and the discount for lack of marketability arising from conversion restrictions.

14


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



The acquisition was accounted for as a business combination. The fair value of consideration transferred was allocated to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values on the acquisition date, with the remaining unallocated amount recorded as goodwill. The purchase price allocation is preliminary as the Company is in the process of finalizing the valuation inputs including growth assumptions, cost projections and discount rates which are used in the fair value calculation of certain assets as well as the determination of the final post-closing net working capital adjustment. The preliminary purchase price allocation is subject to change and such change could be material based on numerous factors, including the final estimated fair value of the assets acquired and liabilities assumed and the amount of the final post-closing net working capital adjustment.

In connection with this acquisition, the Company recorded goodwill of $11.0 million, which is deductible for tax purposes. The Company also recorded $31.0 million in finite-lived intangible assets that included customer relationships and $2.8 million in indefinite-lived intangible assets that included a trade name/trademark. The amortization period for the finite-lived intangible assets is 10.0 years. See Note 13.

The determination of the fair value of intangible assets acquired was primarily based on significant inputs not observable in an active market and thus represent Level 3 fair value measurements as defined under GAAP.

The fair value assigned to the customer relationships was determined based on management's estimate of the retention rate utilizing certain benchmarks. Revenue and earnings projections were also significant inputs into estimating the value of customer relationships.

The fair value assigned to the trade name/trademark was determined utilizing a multi-period excess earnings approach. Under the multi-period excess earnings approach, the fair value of the intangible asset is estimated to be the present value of future earnings attributable to the asset and this method utilizes revenue and cost projections including an assumed contributory asset charge.

The following table presents the net sales and income before taxes from the Boyd Business operations that are included in the Company’s Condensed Consolidated Statements of Operations for the three and six months ended December 31, 2017 (unaudited):
 
Closing Date through December 31, 2017
(In thousands)
 
Net sales
$
26,290

Income before taxes
$
511


The Company has not presented pro forma results of operations for the acquisition because it is not significant to the Company’s consolidated results of operations. However, the Company considers the acquisition to be material to the Company’s financial statements and has provided certain pro forma disclosures pursuant to ASC 805, “Business Combinations.”

The following table sets forth certain unaudited pro forma financial results for the Company for the three and six months ended December 31, 2017 and 2016, as if the acquisition of the Boyd Business was consummated on the same terms as of the first day of the applicable fiscal period.  
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
 
 
2017
 
2016
 
2017
 
2016
(In thousands)
 
 
 
 
 
 
 
 
Net sales
 
$
167,366

 
$
166,107

 
$
321,061

 
$
319,411

Income before taxes
 
$
2,142

 
$
34,171

 
$
779

 
$
36,414


At closing, the parties entered into a transition services agreement where the Seller agreed to provide certain accounting, marketing, sales and distribution support during a transition period of up to 12 months. The Company also entered into a co-manufacturing agreement with the Seller for a transition period of up to 12 months as the Company

15


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


transitions production into its plants. Amounts paid by the Company to the Seller for these services totaled $9.2 million in the three and six months ended December 31, 2017.

The Company incurred transaction costs related to the Boyd Business acquisition, consisting primarily of legal and consulting expenses of $1.0 million and $3.4 million during the three and six months ended December 31, 2017, respectively, which are included in general and administrative expenses in the Company's Condensed Consolidated Statements of Operations.


Note 4. Restructuring Plans
Corporate Relocation Plan
On February 5, 2015, the Company announced a plan (the “Corporate Relocation Plan”) to close its Torrance, California facility (the “Torrance Facility”) and relocate its corporate headquarters, product development lab, and manufacturing and distribution operations from Torrance, California to a new facility in Northlake, Texas (“New Facility”). Approximately 350 positions were impacted as a result of the Torrance Facility closure. The Company’s decision resulted from a comprehensive review of alternatives designed to make the Company more competitive and better positioned to capitalize on growth opportunities.
In the three and six months ended December 31, 2017, no expenses associated with the Corporate Relocation Plan were incurred. As of December 31, 2017, the Company had $0.1 million in unpaid expenses related to employee-related costs, which is expected to be paid by the end of fiscal 2018.
The Company estimated that it would incur approximately $31 million in cash costs in connection with the Corporate Relocation Plan consisting of $18 million in employee retention and separation benefits, $5 million in facility-related costs and $8 million in other related costs. Since the adoption of the Corporate Relocation Plan through December 31, 2017, the Company has recognized a total of $31.5 million in aggregate cash costs including $17.1 million in employee retention and separation benefits, $7.0 million in facility-related costs related to the temporary office space, costs associated with the move of the Company’s headquarters, relocation of the Company’s Torrance operations and certain distribution operations and $7.4 million in other related costs. The Company also recognized from inception through December 31, 2017 non-cash depreciation expense of $2.3 million associated with the Torrance production facility resulting from the consolidation of coffee production operations with the Houston and Portland production facilities and $1.4 million in non-cash rent expense recognized in the sale-leaseback of the Torrance Facility. The Company may incur certain pension-related costs in connection with the Corporate Relocation Plan.


Direct Store Delivery (“DSD”) Restructuring Plan
On February 21, 2017, the Company announced a restructuring plan to reorganize its DSD operations in an effort to realign functions into a channel-based selling organization, streamline operations, acquire certain channel specific expertise, and improve selling effectiveness and financial results (the “DSD Restructuring Plan”). The strategic decision to undertake the DSD Restructuring Plan resulted from an ongoing operational review of various initiatives within the DSD selling organization. The Company has revised its estimated time of completion of the DSD Restructuring Plan from the end of the second quarter of fiscal 2018 to the end of fiscal 2018.
The Company estimates that it will recognize approximately $3.7 million to $4.9 million of pre-tax restructuring charges by the end of fiscal 2018 consisting of approximately $1.9 million to $2.7 million in employee-related costs, including severance, prorated bonuses for bonus eligible employees, contractual termination payments and outplacement services, and $1.8 million to $2.2 million in other related costs, including legal, recruiting, consulting, other professional services, and travel. The Company may also incur other charges not currently contemplated due to events that may occur as a result of, or associated with, the DSD Restructuring Plan.
Expenses related to the DSD Restructuring Plan in the three and six months ended December 31, 2017 consisted of $0 and $24,000, respectively, in employee-related costs and $0.1 million and $0.2 million, respectively, in other related costs. Since the adoption of the DSD Restructuring Plan through December 31, 2017, the Company has recognized and paid a total of $2.7 million in aggregate cash costs including $1.1 million in employee-related costs, and $1.6 million in other related

16


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


costs. The remaining estimated costs of $1.0 million to $2.2 million are expected to be incurred in the remainder of fiscal 2018.
Note 5. New Facility
Lease Agreement and Purchase Option Exercise
On June 15, 2016, the Company exercised the purchase option to purchase the land and the partially constructed New Facility located thereon pursuant to the terms of the lease agreement dated as of July 17, 2015, as amended (the “Lease Agreement”). On September 15, 2016 (“Purchase Option Closing Date”), the Company closed the purchase option and acquired the land and the partially constructed New Facility located thereon for an aggregate purchase price of $42.5 million (the “Purchase Price”), consisting of the purchase option price of $42.0 million based on actual construction costs incurred as of the Purchase Option Closing Date plus the option exercise fee, plus amounts paid in respect of real estate commissions, title insurance, and recording fees. Upon closing of the purchase option, the Company recorded the aggregate purchase price of the New Facility in “Property, plant and equipment, net” on its consolidated balance sheet. The asset related to the New Facility lease obligation included in “Property, plant and equipment, net,” the offsetting liability for the lease obligation included in “Other long-term liabilities” and the rent expense related to the land were reversed. Concurrent with the purchase option closing, on September 15, 2016, the Company terminated the Lease Agreement. The Company did not pay any early termination penalties in connection with the termination of the Lease Agreement.
Development Management Agreement
In conjunction with the Lease Agreement, the Company also entered into a Development Management Agreement with an affiliate of Stream Realty Partners (the “DMA”) to manage, coordinate, represent, assist and advise the Company on matters from the pre-development through construction of the New Facility. Services under the DMA have concluded. The Company incurred and paid $4.0 million under this agreement which is included in “Buildings and Facilities” (see Note 12).
Amended Building Contract
On September 17, 2016, the Company and The Haskell Company (“Builder”) entered into a Change Order, which, among other things, amended the building contract previously entered into between the Company and Builder to provide a guaranteed maximum price and the basis for the price and the scope of Builder’s services in connection with the construction of the New Facility (the “Amended Building Contract”).
Pursuant to the Amended Building Contract, Builder provided pre-construction and construction services, including specialized industrial design and construction work in connection with Builder’s construction of certain production equipment installed in portions of the New Facility (the “Project”). In April 2017, the Company and Builder entered into a change order to change the scope of work which added $0.6 million to the Amended Building Contract. Builder's work on the Project has been completed. The Company incurred and paid $22.5 million for Builder’s services in connection with the Project which amount is included in “Machinery and equipment” (see Note 12).
New Facility Costs
The Company estimated that the total construction costs including the cost of land for the New Facility would be approximately $60 million. As of December 31, 2017, the Company has incurred an aggregate of $60.8 million in construction costs. In addition to the costs to complete the construction of the New Facility, the Company estimated that it would incur approximately $35 million to $39 million for machinery and equipment, furniture and fixtures and related expenditures in connection with construction of the New Facility of which the Company has incurred an aggregate of $33.2 million as of December 31, 2017, including $22.5 million under the Amended Building Contract. The majority of the capital expenditures associated with machinery and equipment, furniture and fixtures, and related expenditures in connection with the initial construction of the New Facility were incurred in the first three quarters of fiscal 2017. The Company commenced distribution activities at the New Facility during the second quarter of fiscal 2017 and initial production activities late in the third quarter of fiscal 2017. The Company began roasting coffee in the New Facility in the fourth quarter of fiscal 2017.
At December 31, 2017, the Company had committed to purchase additional equipment for the New Facility totaling $6.3 million.

17


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



Note 6. Sales of Assets
Sale of Torrance Facility
On July 15, 2016, the Company completed the sale of the Torrance Facility, consisting of approximately 665,000 square feet of buildings located on approximately 20.3 acres of land, for an aggregate cash sale price of $43.0 million, which sale price was subject to customary adjustments for closing costs and documentary transfer taxes. Cash proceeds from the sale of the Torrance Facility were $42.5 million.
Following the closing of the sale, the Company leased back the Torrance Facility on a triple net basis through October 31, 2016 at zero base rent, and exercised two one-month extensions at a base rent of $100,000 per month. In accordance with ASC 840, “Leases,” due to the Company’s continuing involvement with the property, the Company accounted for the transaction as a financing transaction, deferred the gain on sale of the Torrance Facility and recorded the net sale proceeds of $42.5 million and accrued non-cash interest expense on the financing transaction in “Sale-leaseback financing obligation” on the Company's Condensed Consolidated Balance Sheet at September 30, 2016. The Company vacated the Torrance Facility in December 2016 and concluded the leaseback transaction. As a result, at December 31, 2016, the financing transaction qualified for sales recognition under ASC 840. Accordingly, in the three and six months ended December 31, 2016, the Company recognized the net gain from sale of the Torrance Facility in the amount of $37.4 million, including non-cash interest expense of $0.7 million and non-cash rent expense of $1.4 million, representing the rent for the zero base rent period previously recorded in “Other current liabilities” and removed the amounts recorded in “Assets held for sale” and the “Sale-leaseback financing obligation” on its consolidated balance sheet.
Sale of Northern California Branch Property
On September 30, 2016, the Company completed the sale of its branch property in Northern California for a sale price of $2.2 million and leased it back through March 31, 2017, at a base rent of $10,000 per month. The Company recognized a net gain on sale of the Northern California property in the six months ended December 31, 2016 in the amount of $2.0 million.

Note 7. Derivative Instruments
Derivative Instruments Held
Coffee-Related Derivative Instruments
The Company is exposed to commodity price risk associated with its price to be fixed green coffee purchase contracts, which are described further in Note 2 to the consolidated financial statements in the 2017 Form 10-K. The Company utilizes forward and option contracts to manage exposure to the variability in expected future cash flows from forecasted purchases of green coffee attributable to commodity price risk. Certain of these coffee-related derivative instruments utilized for risk management purposes have been designated as cash flow hedges, while other coffee-related derivative instruments have not been designated as cash flow hedges or do not qualify for hedge accounting despite hedging the Company’s future cash flows on an economic basis.
The following table summarizes the notional volumes for the coffee-related derivative instruments held by the Company at December 31, 2017 and June 30, 2017:
(In thousands)
 
December 31, 2017
 
June 30, 2017
Derivative instruments designated as cash flow hedges:
 
 
 
 
  Long coffee pounds
 
31,763

 
33,038

Derivative instruments not designated as cash flow hedges:
 
 
 
 
  Long coffee pounds
 
1,612

 
2,121

      Total
 
33,375

 
35,159


Coffee-related derivative instruments designated as cash flow hedges outstanding as of December 31, 2017 will expire within 19 months.

18


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



Effect of Derivative Instruments on the Financial Statements
Balance Sheets
Fair values of derivative instruments on the Company’s Condensed Consolidated Balance Sheets:
 
 
Derivative Instruments
Designated as Cash Flow Hedges
 
Derivative Instruments Not Designated as Accounting Hedges
 
 
December 31, 2017
 
June 30, 2017
 
December 31, 2017
 
June 30, 2017
(In thousands)
 
 
 
 
 
 
 
 
Financial Statement Location:
 
 
 
 
 
 
 
 
Short-term derivative assets(1):
 
 
 
 
 
 
 
 
Coffee-related derivative instruments
 
$
233

 
$
66

 
$
40

 
$

Long-term derivative assets(2):
 
 
 
 
 
 
 
 
Coffee-related derivative instruments
 
$
99

 
$
66

 
$

 
$

Short-term derivative liabilities(1):
 
 
 
 
 
 
 
 
Coffee-related derivative instruments
 
$
1,665

 
$
1,733

 
$
258

 
$
190

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

 
$
446

 
$

 
$

________________
(1) Included in “Short-term derivative liabilities” on the Company’s Condensed Consolidated Balance Sheets.
(2) Included in "Other assets" and “Other long-term liabilities” on the Company’s Condensed Consolidated Balance Sheets at December 31, 2017 and June 30, 2017, respectively.
Statements of Operations
The following table presents pretax net gains and losses for the Company’s coffee-related derivative instruments designated as cash flow hedges, as recognized in accumulated other comprehensive income (loss) “AOCI,” “Cost of goods sold” and “Other, net”:
 
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
Financial Statement Classification
(In thousands)
 
2017
 
2016
 
2017
 
2016
 
Net losses recognized in AOCI
 
$
(2,094
)
 
$
(2,943
)
 
$
(2,459
)
 
$
(2,217
)
 
AOCI
Net (losses) gains recognized in earnings
 
$
(597
)
 
$
215

 
$
(604
)
 
$
(250
)
 
Costs of goods sold
Net (losses) gains recognized in earnings (ineffective portion)(1)
 
$

 
$
(41
)
 
$
48

 
$
(28
)
 
Other, net
________________
(1) Amount included in six months ended December 31, 2017 relates to trades terminated prior to the adoption of ASU 2017-12. See Note 2.

For the three and six months ended December 31, 2017 and 2016, there were no gains or losses recognized in earnings as a result of excluding amounts from the assessment of hedge effectiveness or as a result of reclassifications to earnings following the discontinuance of any cash flow hedges.
Net losses on derivative instruments and investments in the Company’s Condensed Consolidated Statements of Cash Flows also include net losses on coffee-related derivative instruments designated as cash flow hedges reclassified to cost of goods sold from AOCI in the six months ended December 31, 2017 and 2016. Gains and losses on derivative instruments not designated as accounting hedges are included in “Other, net” in the Company’s Condensed Consolidated Statements of Operations and in “Net losses on derivative instruments and investments” in the Company’s Condensed Consolidated Statements of Cash Flows.

19


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


Net gains and losses recorded in “Other, net” are as follows:
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(In thousands)
 
2017
 
2016
 
2017
 
2016
Net losses on coffee-related derivative instruments
 
$
(190
)
 
$
(1,204
)
 
$
(93
)
 
$
(1,240
)
Net gains (losses) on investments
 
16

 
(1,320
)
 
7

 
(1,092
)
     Net losses on derivative instruments and investments(1)
 
(174
)
 
(2,524
)
 
(86
)
 
(2,332
)
     Other gains, net
 
728

 
201

 
727

 
200

             Other, net
 
$
554

 
$
(2,323
)
 
$
641

 
$
(2,132
)
___________
(1) Excludes net losses on coffee-related derivative instruments designated as cash flow hedges recorded in cost of goods sold in the three and six months ended December 31, 2017 and 2016.

Offsetting of Derivative Assets and Liabilities
The Company has agreements in place that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, the Company maintains accounts with its brokers to facilitate financial derivative transactions in support of its risk management activities. Based on the value of the Company’s positions in these accounts and the associated margin requirements, the Company may be required to deposit cash into these broker accounts.
The following table presents the Company’s net exposure from its offsetting derivative asset and liability positions as of the reporting dates indicated:
(In thousands)
 
 
 
Gross Amount Reported on Balance Sheet
 
Netting Adjustments
 
Cash Collateral Posted
 
Net Exposure
December 31, 2017
 
Derivative Assets
 
$
372

 
$
(372
)
 
$

 
$

 
 
Derivative Liabilities
 
$
1,923

 
$
(372
)
 
$

 
$
1,551

June 30, 2017
 
Derivative Assets
 
$
132

 
$
(132
)
 
$

 
$

 
 
Derivative Liabilities
 
$
2,369

 
$
(132
)
 
$

 
$
2,237

Cash Flow Hedges
Changes in the fair value of the Company’s coffee-related derivative instruments designated as cash flow hedges, to the extent effective, are deferred in AOCI and reclassified into cost of goods sold in the same period or periods in which the hedged forecasted purchases affect earnings, or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. Based on recorded values at December 31, 2017, $(4.1) million of net losses on coffee-related derivative instruments designated as cash flow hedges are expected to be reclassified into cost of goods sold within the next twelve months. These recorded values are based on market prices of the commodities as of December 31, 2017. Due to the volatile nature of commodity prices, actual gains or losses realized within the next twelve months will likely differ from these values.

20


Note 8. Investments
The following table shows gains and losses on trading securities: 
 
 
Three Months Ended December 31,
 
Six Months Ended December 31,
(In thousands)
 
2017
 
2016
 
2017
 
2016
Total gains (losses) recognized from trading securities
 
$
16

 
$
(1,350
)
 
$
7

 
$
(1,091
)
Less: Realized (losses) gains from sales of trading securities
 

 
(2
)
 
7

 
(2
)
Unrealized gains (losses) from trading securities
 
$
16

 
$
(1,348
)
 
$

 
$
(1,089
)

Note 9. Fair Value Measurements
Assets and liabilities measured and recorded at fair value on a recurring basis were as follows: 
(In thousands)
 
Total
 
Level 1
 
Level 2
 
Level 3
December 31, 2017
 
 
 
 
 
 
 
 
Preferred stock
 
$

 
$

 
$

 
$

Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative assets(1)
 
$
332

 
$

 
$
332

 
$

Coffee-related derivative liabilities(1)
 
$
1,665

 
$

 
$
1,665

 
$

Derivative instruments not designated as accounting hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative assets(1)
 
$
40

 
$

 
$
40

 
$

Coffee-related derivative liabilities(1)
 
$
258

 
$

 
$
258

 
$

 
 
 
 
 
 
 
 
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
June 30, 2017
 
 
 
 
 
 
 
 
Preferred stock(2)
 
$
368

 
$

 
$
368

 
$

Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative assets(1)
 
$
132

 
$

 
$
132


$

Coffee-related derivative liabilities(1)
 
$
2,179

 
$

 
$
2,179

 
$

Derivative instruments not designated as accounting hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative liabilities(1)
 
$
190

 
$

 
$
190

 
$

____________________ 
(1)
The Company’s coffee-related derivative instruments are traded over-the-counter and, therefore, classified as Level 2.
(2)
Included in “Short-term investments” on the Company’s Condensed Consolidated Balance Sheets.

Note 10. Accounts Receivable, Net
(In thousands)
 
December 31, 2017
 
June 30, 2017
Trade receivables
 
$
58,727

 
$
44,531

Other receivables(1)
 
4,320

 
2,636

Allowance for doubtful accounts
 
(772
)
 
(721
)
    Accounts receivable, net
 
$
62,275

 
$
46,446

__________
(1) At December 31, 2017 and June 30, 2017, respectively, the Company had recorded $1.0 million and $0.4 million, in “Other receivables” included in “Accounts receivable, net” on its Condensed Consolidated Balance Sheets representing earnout receivable from Harris Spice Company.




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


Note 11. Inventories
(In thousands)
 
December 31, 2017
 
June 30, 2017
Coffee
 
 
 
 
   Processed
 
$
14,514

 
$
14,085

   Unprocessed
 
27,436

 
17,083

         Total
 
$
41,950

 
$
31,168

Tea and culinary products
 
 
 
 
   Processed
 
$
23,432

 
$
20,741

   Unprocessed
 
999

 
74

         Total
 
$
24,431

 
$
20,815

Coffee brewing equipment parts
 
$
6,903

 
$
4,268

              Total inventories
 
$
73,284

 
$
56,251


In addition to product cost, inventory costs include expenditures such as direct labor and certain supply and overhead 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.
The Company does not expect inventory levels at June 30, 2018 to decrease from the levels at June 30, 2017 and, therefore, recorded no expected beneficial effect of the liquidation of LIFO inventory quantities in the three and six months ended December 31, 2017. The Company recorded $0.8 million and $1.7 million in expected beneficial effect of the liquidation of LIFO inventory quantities in cost of goods sold in the three and six months ended December 31, 2016, respectively. Interim LIFO calculations must necessarily be based on management’s estimates of expected fiscal year-end inventory levels and costs. Because these estimates are subject to many forces beyond management’s control, interim results are subject to the final fiscal year-end LIFO inventory valuation.

Note 12. Property, Plant and Equipment
(In thousands)
 
December 31, 2017
 
June 30, 2017
Buildings and facilities
 
$
108,999

 
$
108,682

Machinery and equipment
 
212,180

 
201,236

Equipment under capital leases
 
7,516

 
7,540

Capitalized software
 
23,063

 
21,794

Office furniture and equipment
 
12,612

 
12,758

 
 
364,370

 
352,010

Accumulated depreciation
 
(202,558
)
 
(192,280
)
Land
 
16,336

 
16,336

Property, plant and equipment, net
 
$
178,148

 
$
176,066



Note 13. Goodwill and Intangible Assets
The carrying value of goodwill in the six months ended December 31, 2017 increased by $10.9 million. This was due to the acquisition of the Boyd Business adding $11.0 million of goodwill as well as the final working capital adjustment made to the West Coast Coffee purchase price allocation which reduced goodwill by $0.1 million. The carrying value of goodwill at December 31, 2017 and June 30, 2017 was $21.9 million and $11.0 million, respectively.

22


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



The following is a summary of the Company’s amortized and unamortized intangible assets other than goodwill:
 
 
 
December 31, 2017
 
June 30, 2017
(In thousands)
 
Gross Carrying
Amount(1)
 
Accumulated
Amortization(1)
 
Gross Carrying
Amount(1)
 
Accumulated
Amortization(1)
Amortized intangible assets:
 
 
 
 
 
 
 
 
Customer relationships
 
$
48,353

 
$
(12,074
)
 
$
17,353

 
$
(10,883
)
Non-compete agreements
 
220

 
(61
)
 
220

 
(38
)
Recipes
 
930

 
(155
)
 
930

 
(88
)
Trade name/brand name
 
510

 
(185
)
 
510

 
(84
)
Total amortized intangible assets
 
$
50,013

 
$
(12,475
)
 
$
19,013

 
$
(11,093
)
Unamortized intangible assets:
 
 
 
 
 
 
 
 
Trade names with indefinite lives
 
$
3,640

 
$

 
$
3,640

 
$

Trademarks and brand name with indefinite lives
 
9,858

 

 
7,058

 

Total unamortized intangible assets
 
$
13,498

 
$

 
$
10,698

 
$

     Total intangible assets
 
$
63,511

 
$
(12,475
)
 
$
29,711

 
$
(11,093
)
___________
(1) Reflects the preliminary purchase price allocation for the acquisition of the Boyd Business. Subject to change based on numerous factors, including the final estimated fair value of the assets acquired and the liabilities assumed and the amount of the final post-closing net working capital adjustment. Adjustments in the purchase price allocation may require a recasting of the amounts allocated to goodwill and intangible assets.

Aggregate amortization expense for the three months ended December 31, 2017 and 2016 was $1.1 million and $0.1 million, respectively. Aggregate amortization expense for the six months ended December 31, 2017 and 2016 was $1.4 million and $0.1 million, respectively.

Note 14. Employee Benefit Plans
The Company provides benefit plans for most full-time employees, including 401(k), health and other welfare benefit plans and, in certain circumstances, pension benefits. Generally, the plans provide benefits based on years of service and/or a combination of years of service and earnings. In addition, the Company contributes to two multiemployer defined benefit pension plans, one multiemployer defined contribution pension plan and ten multiemployer defined contribution plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. In addition, the Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees and provides retiree medical coverage and, depending on the age of the retiree, dental and vision coverage. The Company also provides a postretirement death benefit to certain of its employees and retirees.
The Company is required to recognize the funded status of a benefit plan in its consolidated balance sheets. The Company is also required to recognize in other comprehensive income (“OCI”) certain gains and losses that arise during the period but are deferred under pension accounting rules.
Single Employer Pension Plans
The Company has a defined benefit pension plan, the Farmer Bros. Co. Pension Plan for Salaried Employees (the “Farmer Bros. Plan”), for Company employees hired prior to January 1, 2010, who are not covered under a collective bargaining agreement. The Company amended the Farmer Bros. Plan, freezing the benefit for all participants effective June 30, 2011. After the plan freeze, participants do not accrue any benefits under the Farmer Bros. Plan, and new hires are not eligible to participate in the Farmer Bros. Plan. As all plan participants became inactive following this pension curtailment, net (gain) loss is now amortized based on the remaining life expectancy of these participants instead of the remaining service period of these participants.
The Company also has two defined benefit pension plans for certain hourly employees covered under collective bargaining agreements (the “Brewmatic Plan” and the “Hourly Employees’ Plan”). Effective October 1, 2016, the Company

23


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


froze benefit accruals and participation in the Hourly Employees’ Plan. After the plan freeze, participants do not accrue any benefits under the plan, and new hires are not eligible to participate in the plan. After the freeze, the participants in the plan are eligible to receive the Company’s matching contributions to their 401(k).
The net periodic benefit cost for the defined benefit pension plans is as follows:
 
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
(In thousands)
 
 
 
 
Service cost
 
$

 
$
124

 
$

 
$
248

Interest cost
 
1,432

 
1,397

 
2,864

 
2,794

Expected return on plan assets
 
(1,456
)
 
(1,607
)
 
(2,912
)
 
(3,214
)
Amortization of net loss(1)
 
418

 
508

 
836

 
1,016

Net periodic benefit cost
 
$
394

 
$
422

 
$
788

 
$
844

___________
(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
 
Fiscal
 
2018
 
2017
Discount rate
3.80%
 
3.55%
Expected long-term return on plan assets
6.75%
 
7.75%
 
Basis Used to Determine Expected Long-Term Return on Plan Assets
The expected long-term return on plan assets assumption was developed as a weighted average rate based on the target asset allocation of the plan and the Long-Term Capital Market Assumptions (CMA) 2014. The capital market assumptions were developed with a primary focus on forward-looking valuation models and market indicators. The key fundamental economic inputs for these models are future inflation, economic growth, and interest rate environment. Due to the long-term nature of the pension obligations, the investment horizon for the CMA 2014 is 20 to 30 years. In addition to forward-looking models, historical analysis of market data and trends was reflected, as well as the outlook of recognized economists, organizations and consensus CMA from other credible studies.
Multiemployer Pension Plans
The Company participates in two multiemployer defined benefit pension plans that are union sponsored and collectively bargained for the benefit of certain employees subject to collective bargaining agreements, of which the Western Conference of Teamsters Pension Plan (“WCTPP”) is individually significant. The Company makes contributions to these plans generally based on the number of hours worked by the participants in accordance with the provisions of negotiated labor contracts.
The risks of participating in multiemployer pension plans are different from single-employer plans in that: (i) assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (iii) if the Company stops participating in the multiemployer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
On October 30, 2017, counsel to the Company received written confirmation that the Western Conference of Teamsters Pension Trust (the “WCT Pension Trust”) will be retracting its claim, stated in its letter to the Company dated July 10, 2017 (the “WCT Pension Trust Letter”), that certain of the Company’s employment actions in 2015 resulting from the Corporate Relocation Plan constituted a partial withdrawal from the WCTPP.  The written confirmation stated that the WCT Pension Trust has determined that a partial withdrawal did not occur in 2015 and further stated that the withdrawal liability assessment has been rescinded.  This rescinding of withdrawal liability assessment applies to Company employment actions in 2015 with respect to the bargaining units that were specified in the WCT Pension Trust Letter.  As of

24


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


December 31, 2017, the Company is not able to predict whether the WCT Pension Trust may make a claim, or estimate the extent of potential withdrawal liability, related to the Corporate Relocation Plan for actions or bargaining units other than those specified in the WCT Pension Trust Letter.
In fiscal 2012, the Company withdrew from the Local 807 Labor-Management Pension Fund (“Pension Fund”) and recorded a charge of $4.3 million associated with withdrawal from this plan, representing the present value of the estimated withdrawal liability expected to be paid in quarterly installments of $0.1 million over 80 quarters. On November 18, 2014, the Pension Fund sent the Company a notice of assessment of withdrawal liability in the amount of $4.4 million, which the Pension Fund adjusted to $4.9 million on January 5, 2015. The Company is in the process of negotiating a reduced liability amount. The Company has commenced quarterly installment payments to the Pension Fund of $91,000 pending the final settlement of the liability. The total estimated withdrawal liability is $4.0 million and its present value are reflected in the Company’s Condensed Consolidated Balance Sheets at December 31, 2017 and June 30, 2017 as short-term with the expectation of paying off the liability in fiscal 2018.
Future collective bargaining negotiations may result in the Company withdrawing from the remaining multiemployer pension plans in which it participates and, if successful, the Company may incur a withdrawal liability, the amount of which could be material to the Company’s results of operations and cash flows.
Multiemployer Plans Other Than Pension Plans
The Company participates in ten 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 July 31, 2020.
401(k) Plan
The Company’s 401(k) Plan is available to all eligible employees who have worked more than 1,000 hours during a calendar year and were employed at the end of the calendar year. Participants in the 401(k) Plan may choose to contribute a percentage of their annual pay subject to the maximum contribution allowed by the Internal Revenue Service. The Company’s matching contribution is discretionary, based on approval by the Company’s Board of Directors. For the calendar years 2018 and 2017, the Company’s Board of Directors approved a Company matching contribution of 50% of an employee’s annual contribution to the 401(k) Plan, up to 6% of the employee’s eligible income. The matching contributions (and any earnings thereon) vest at the rate of 20% for each of the participant’s first 5 years of vesting service, so that a participant is fully vested in his or her matching contribution account after 5 years of vesting service, subject to accelerated vesting under certain circumstances in connection with the Corporate Relocation Plan due to the closure of the Company’s Torrance Facility, a reduction-in-force at another Company facility designated by the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement Plans, or in connection with certain reductions-in-force that occurred during 2017. A participant is automatically vested in the event of death, disability or attainment of age 65 while employed by the Company. Employees are 100% vested in their contributions. For employees subject to a collective bargaining agreement, the match is only available if so provided in the labor agreement.
The Company recorded matching contributions of $0.5 million and $0.3 million in operating expenses in the three months ended December 31, 2017 and 2016, respectively, and $1.0 million and $0.8 million in operating expenses in the six months ended December 31, 2017 and 2016, respectively.
Postretirement Benefits
The Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees (“Retiree Medical Plan”). The plan provides medical, dental and vision coverage for retirees under age 65 and medical coverage only for retirees age 65 and above. Under this postretirement plan, the Company’s contributions toward premiums for retiree medical, dental and vision coverage for participants and dependents are scaled based on length of service, with greater Company contributions for retirees with greater length of service, subject to a maximum monthly Company contribution.

25


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


The Company also provides a postretirement death benefit (“Death Benefit”) to certain of its employees and retirees, subject, in the case of current employees, to continued employment with the Company until retirement and certain other conditions related to the manner of employment termination and manner of death. The Company records the actuarially determined liability for the present value of the postretirement death benefit. The Company has purchased life insurance policies to fund the postretirement death benefit wherein the Company owns the policy but the postretirement death benefit is paid to the employee’s or retiree’s beneficiary. The Company records an asset for the fair value of the life insurance policies which equates to the cash surrender value of the policies. 
Retiree Medical Plan and Death Benefit
The following table shows the components of net periodic postretirement benefit cost for the Retiree Medical Plan and Death Benefit for the three and six months ended December 31, 2017 and 2016. Net periodic postretirement benefit cost for the three and six months ended December 31, 2017 was based on employee census information and asset information as of June 30, 2017. 
 
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
 
 
2017
 
2016
 
2017
 
2016
(In thousands)
 
 
 
 
 
 
 
 
Service cost
 
$
152

 
$
190

 
$
304

 
$
380

Interest cost
 
209

 
207

 
418

 
414

Amortization of net gain
 
(210
)
 
(157
)
 
(420
)
 
(314
)
Amortization of prior service credit
 
(439
)
 
(439
)
 
(878
)
 
(878
)
Net periodic postretirement benefit credit
 
$
(288
)
 
$
(199
)
 
$
(576
)
 
$
(398
)

Weighted-Average Assumptions Used to Determine Net Periodic Postretirement Benefit Cost 
 
Fiscal
 
2018
 
2017
Retiree Medical Plan discount rate
4.13%
 
3.73%
Death Benefit discount rate
4.12%
 
3.79%

Note 15. Bank Loan
The Company maintains a $125.0 million senior secured revolving credit facility (the “Revolving Facility”) with JPMorgan Chase Bank, N.A. and SunTrust Bank (collectively, the “Lenders”), with a sublimit on letters of credit and swingline loans of $30.0 million and $15.0 million respectively. The Revolving Facility includes an accordion feature whereby the Company may increase the Revolving Commitment by up to an additional $50.0 million, subject to certain conditions. Advances are based on the Company’s eligible accounts receivable, eligible inventory, and the value of certain real property and trademarks, less required reserves. The commitment fee is a flat fee of 0.25% per annum irrespective of average revolver usage. Outstanding obligations are collateralized by all of the Company’s assets, excluding certain real property not included in the borrowing base and machinery and equipment (other than inventory). Borrowings under the Revolving Facility bear interest based on average historical excess availability levels with a range of PRIME - 0.25% to PRIME + 0.50% or Adjusted LIBO Rate + 1.25% to Adjusted LIBO Rate + 2.00%. The Company is subject to a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including financial covenants relating to the maintenance of a fixed charge coverage ratio in certain circumstances, and the right of the Lenders to establish reserve requirements, which may reduce the amount of credit otherwise available to the Company. The Company is allowed to pay dividends, provided, among other things, certain excess availability requirements are met, and no event of default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The Revolving Facility matures on August 25, 2022.
At December 31, 2017, the Company was eligible to borrow up to a total of $110.0 million under the Revolving Facility and had outstanding borrowings of $84.4 million, utilized $1.1 million of the letters of credit sublimit, and had excess availability under the Revolving Facility of $24.5 million. At December 31, 2017, the weighted average interest rate
on the Company’s outstanding borrowings under the Revolving Facility was 3.62% and the Company was in compliance with all of the restrictive covenants under the Revolving Facility.

Note 16. Share-based Compensation
Farmer Bros. Co. 2017 Long-Term Incentive Plan
On June 20, 2017 (the “Effective Date”), the Company’s stockholders approved the Farmer Bros. Co. 2017 Long-Term Incentive Plan (the “2017 Plan”). The 2017 Plan succeeded the Company’s prior long-term incentive plans, the Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (the “Amended Equity Plan”) and the Farmer Bros. Co. 2007 Omnibus Plan (collectively, the “Prior Plans”). On the Effective Date, the Company ceased granting awards under the Prior Plans; however, awards outstanding under the Prior Plans will remain subject to the terms of the applicable Prior Plan. The 2017 Plan provides for the grant of stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance shares and other stock- or cash-based awards to eligible participants. The 2017 Plan also authorizes the grant of awards that are intended to qualify as “qualified performance-based compensation” within the meaning of Section 162(m) of the Internal Revenue Code. Non-employee directors of the Company and employees of the Company or any of its subsidiaries are eligible to receive awards under the 2017 Plan.
The 2017 Plan authorizes the issuance of (i) 900,000 shares of common stock plus (ii) the number of shares of common stock subject to awards under the Company’s Prior Plans that are outstanding as of the Effective Date and that expire or are forfeited, cancelled or similarly lapse following the Effective Date. Subject to certain limitations, shares of common stock covered by awards granted under the 2017 Plan that are forfeited, expire or lapse, or are repurchased for or paid in cash, may be used again for new grants under the 2017 Plan. As of December 31, 2017, there were 950,914 shares available under the 2017 Plan including shares that were forfeited under the Prior Plans. Shares of common stock granted under the 2017 Plan may be authorized but unissued shares, shares purchased on the open market or treasury shares. In no event will more than 900,000 shares of common stock be issuable pursuant to the exercise of incentive stock options under the 2017 Plan.
The 2017 Plan contains a minimum vesting requirement, subject to limited exceptions, that awards made under the 2017 Plan may not vest earlier than the date that is one year following the grant date of the award. The 2017 Plan also contains provisions with respect to payment of exercise or purchase prices, vesting and expiration of awards, adjustments and treatment of awards upon certain corporate transactions, including stock splits, recapitalizations and mergers, transferability of awards and tax withholding requirements.
The 2017 Plan may be amended or terminated by the Board at any time, subject to certain limitations requiring stockholder consent or the consent of the applicable participant. In addition, the Administrator of the 2017 Plan may not, without the approval of the Company’s stockholders, authorize certain re-pricings of any outstanding stock options or stock appreciation rights granted under the 2017 Plan. The 2017 Plan will expire on June 20, 2027.
Non-qualified stock options with time-based vesting (“NQOs”)
In the six months ended December 31, 2017, the Company granted 124,278 shares issuable upon the exercise of NQOs to eligible employees under the 2017 Plan. These NQOs have an exercise price of $31.70 per share, which was the closing price of the Company’s common stock as reported on the NASDAQ Global Select Market on the date of grant. One-third of the total number of shares subject to each such stock option vest ratably on each of the first three anniversaries of the grant date, contingent on continued employment, and subject to accelerated vesting in certain circumstances.

26


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


Following are the assumptions used in the Black-Scholes valuation model for NQOs granted during the six months ended December 31, 2017.
 
Six Months Ended 
December 31, 2017
Weighted average fair value of NQOs
$31.70
Risk-free interest rate
2.0%
Dividend yield
—%
Average expected term
4.6 years
Expected stock price volatility
35.4%

The following table summarizes NQO activity for the six months ended December 31, 2017:
Outstanding NQOs:
 
Number
of NQOs
 
Weighted
Average
Exercise
Price ($)
 
Weighted
Average
Grant Date
Fair Value ($)
 
Weighted
Average
Remaining
Life
(Years)
 
Aggregate
Intrinsic
Value
($ in thousands)
Outstanding at June 30, 2017
 
133,464

 
13.05
 
5.99
 
2.6
 
2,299

Granted
 
124,278

 
31.70
 
10.41
 
6.9
 

Exercised
 
(37,266
)
 
12.09
 
5.57
 
 
752

Cancelled/Forfeited
 
(4,194
)
 
24.41
 
10.60
 
 

Outstanding at December 31, 2017
 
216,282

 
23.71
 
8.51
 
4.8
 
1,825

Vested and exercisable at December 31, 2017
 
89,055

 
12.33
 
5.74
 
2.0
 
1,765

Vested and expected to vest at December 31, 2017
 
205,308

 
23.28
 
8.41
 
4.7
 
1,820

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 $32.15 at December 29, 2017 and $30.25 at June 30, 2017, representing the last trading day of the respective fiscal 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 six months ended December 31, 2017 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.
During the six months ended December 31, 2017, 945 NQOs vested and 37,266 NQOs were exercised. Total fair value of NQOs vested during the six months ended December 31, 2017 was $12,000. The Company received $0.5 million and $0.4 million in proceeds from exercises of vested NQOs in the six months ended December 31, 2017 and 2016, respectively.
At December 31, 2017 and June 30, 2017, respectively, there was $1.3 million and $80,000 of unrecognized compensation cost related to NQOs. The unrecognized compensation cost related to NQOs at December 31, 2017 is expected to be recognized over the weighted average period of 2.8 years. Total compensation expense for NQOs in the three months ended December 31, 2017 and 2016 was $62,000 and $47,000, respectively. Total compensation expense for NQOs in the six months ended December 31, 2017 and 2016 was $64,000 and $89,000, respectively.

27


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


Non-qualified stock options with performance-based and time-based vesting (PNQs”)
In the six months ended December 31, 2017, the Company granted no shares issuable upon the exercise of PNQs. The following table summarizes PNQ activity for the six months ended December 31, 2017:
Outstanding PNQs:
 
Number
of
PNQs
 
Weighted
Average
Exercise
Price ($)
 
Weighted
Average
Grant Date
Fair Value ($)
 
Weighted
Average
Remaining
Life
(Years)
 
Aggregate
Intrinsic
Value
($ in 
thousands)
Outstanding at June 30, 2017
 
358,786

 
27.75
 
10.96
 
5.2
 
1,181

Granted
 

 
 
 
 

Exercised
 
(6,679
)
 
26.10
 
10.87
 
 
45

Cancelled/Forfeited
 
(43,330
)
 
32.10
 
11.43
 
 

Outstanding at December 31, 2017
 
308,777

 
27.17
10.93

10.90
 
4.6
 
1,590

Vested and exercisable at December 31, 2017
 
200,904

 
25.87
 
10.80
 
4.2
 
1,278

Vested and expected to vest at December 31, 2017
 
303,990

 
27.10
 
10.89
 
4.5
 
1,585


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 $32.15 at December 29, 2017 and $30.25 at June 30, 2017 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 six months ended December 31, 2017 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.
During the six months ended December 31, 2017, 56,822 PNQs vested and 6,679 PNQs were exercised. Total fair value of PNQs vested during the six months ended December 31, 2017 was $0.6 million. The Company received $0.2 million and $0.1 million in proceeds from exercises of vested PNQs in the six months ended December 31, 2017 and 2016, respectively.
As of December 31, 2017, the Company met the performance targets for the fiscal 2016 PNQ awards and the fiscal 2015 PNQ awards.
In the six months ended December 31, 2017, based on the Company’s failure to achieve certain financial objectives over the applicable performance period, a total of 33,738 shares subject to fiscal 2017 PNQ awards were forfeited, representing 20% of the shares subject to each such award. Subject to certain continued employment conditions and subject to accelerated vesting in certain circumstances, one half of the remaining PNQs subject to the fiscal 2017 PNQ awards are scheduled to vest on each of the second and third anniversaries of the grant date.
At December 31, 2017 and June 30, 2017, there was $0.9 million and $1.8 million, respectively, of unrecognized compensation cost related to PNQs. The unrecognized compensation cost related to PNQs at December 31, 2017 is expected to be recognized over the weighted average period of 1.2 years. Total compensation expense related to PNQs in the three months ended December 31, 2017 and 2016 was $0.2 million and $0.4 million, respectively. Total compensation expense related to PNQs in the six months ended December 31, 2017 and 2016 was $0.4 million and $0.6 million, respectively.
Restricted Stock
During the six months ended December 31, 2017, the Company granted 13,110 shares of restricted stock under the 2017 Plan, including 11,406 shares of restricted stock to non-employee directors with a grant date fair value of $34.20 per share and 1,704 shares of restricted stock to eligible employees with a grant date fair value of $31.70 per share. The fiscal 2018 restricted stock awards cliff vest on the earlier of the one year anniversary of the grant date or the date of the first annual meeting of the Company’s stockholders immediately following the grant date, in the case of non-employee directors, and the third anniversary of the grant date, in the case of eligible employees, in each case subject to continued service to the Company through the vesting date and the acceleration provisions of the 2017 Plan and restricted stock agreement. During the six months ended December 31, 2016, the Company granted 5,106 shares of restricted stock to non-employee directors.
During the six months ended December 31, 2017, 7,934 shares of restricted stock vested.

28


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



The following table summarizes restricted stock activity for the six months ended December 31, 2017:
Outstanding and Nonvested Restricted Stock Awards:
 
Shares
Awarded
 
Weighted
Average
Grant Date
Fair Value
($)
 
Weighted
Average
Remaining
Life
(Years)
 
Aggregate
Intrinsic
Value
($ in thousands)
Outstanding and nonvested at June 30, 2017
 
15,445

 
29.79

 
0.9
 
467

Granted
 
13,110

 
33.88

 
1.7
 
444

Vested/Released
 
(7,934
)
 
32.77

 
 
272

Cancelled/Forfeited
 
(3,390
)
 
25.57

 
 

Outstanding and nonvested at December 31, 2017
 
17,231

 
32.35

 
1.6
 
554

Expected to vest at December 31, 2017
 
16,411

 
32.32

 
1.5
 
528


The aggregate intrinsic values of shares outstanding at the end of each fiscal period in the table above represent the total pretax intrinsic values, based on the Company’s closing stock price of $32.15 at December 29, 2017 and $30.25 at June 30, 2017, representing the last trading day of the respective fiscal periods. Restricted stock that is expected to vest is net of estimated forfeitures.
At December 31, 2017 and June 30, 2017, there was $0.5 million and $0.3 million, respectively, of unrecognized compensation cost related to restricted stock. The unrecognized compensation cost related to restricted stock at December 31, 2017 is expected to be recognized over the weighted average period of 1.1 years. Total compensation expense for restricted stock was $0.1 million in each of the three months ended December 31, 2017 and 2016. Total compensation expense for restricted stock was $0.1 million in each of the six months ended December 31, 2017 and 2016.
Performance-Based Restricted Stock Units (“PBRSUs”)
During the six months ended December 31, 2017, the Company granted 37,414 PBRSUs under the 2017 Plan to eligible employees with a grant date fair value of $31.70 per unit. The fiscal 2018 PBRSU awards cliff vest on the third anniversary of the date of grant based on the Company’s achievement of certain financial performance goals for the performance period July 1, 2017 through June 30, 2020, subject to certain continued employment conditions and subject to acceleration provisions of the 2017 Plan and restricted stock unit agreement. At the end of the three-year performance period, the number of PBRSUs that actually vest will be 0% to 150% of the target amount, depending on the extent to which the Company meets or exceeds the achievement of those financial performance goals measured over the full three-year performance period. No PBRSUs were granted during the six months ended December 31, 2016.
The following table summarizes PBRSU activity for the six months ended December 31, 2017:
Outstanding and Nonvested PBRSUs:
 
PBRSUs
Awarded
 
Weighted
Average
Grant Date
Fair Value
($)
 
Weighted
Average
Remaining
Life
(Years)
 
Aggregate
Intrinsic
Value
($ in thousands)
Outstanding and nonvested at June 30, 2017
 

 

 

 

Granted(1)
 
37,414

 
31.70

 

 
1,186

Vested/Released
 

 

 

 

Cancelled/Forfeited
 

 

 

 

Outstanding and nonvested at December 31, 2017
 
37,414

 
31.70

 
2.9

 
1,203

Expected to vest at December 31, 2017
 
32,495

 
31.70

 
2.9

 
1,045

_____________
(1) The target number of PBRSUs is presented in the table. Under the terms of the awards, the recipient may earn between 0% and 150% of the target number of PBRSUs depending on the extent to which the Company meets or exceeds the achievement of the applicable financial performance goals.

The aggregate intrinsic value of PBRSUs outstanding at December 31, 2017 represents the total pretax intrinsic value, based on the Company’s closing stock price of $32.15 at December 29, 2017, representing the last trading day of the fiscal period. PBRSUs that are expected to vest are net of estimated forfeitures.

29


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



At December 31, 2017 and June 30, 2017, there was $1.1 million and $0, respectively, of unrecognized compensation cost related to PBRSUs. The unrecognized compensation cost related to PBRSUs at December 31, 2017 is expected to be recognized over the weighted average period of 2.9 years. Total compensation expense for PBRSUs was $48,000 and $0 for the three months ended December 31, 2017 and 2016, respectively. Total compensation expense for PBRSUs was $48,000 and $0 for the six months ended December 31, 2017 and 2016, respectively.
Note 17. Other Long-Term Liabilities
Other long-term liabilities include the following:
(In thousands)
 
December 31, 2017
 
June 30, 2017
Earnout payable(1)
 
$
1,100

 
$
1,100

Derivative liabilities—noncurrent
 

 
380

Multiemployer Plan Holdback—Boyd Coffee
 
1,056

 

Other long-term liabilities
 
$
2,156

 
$
1,480

___________
(1) Includes $0.5 million and $0.6 million in earnout payable in connection with the Company’s acquisition of substantially all of the assets of China Mist completed on October 11, 2016 and the Company’s acquisition of West Coast Coffee completed on February 7, 2017, respectively. See Note 3.

Note 18. Income Taxes
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The SEC subsequently issued Staff Accounting Bulletin No. 118, “Income Tax Accounting Implications of the Tax Cuts and Jobs Act” (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. Under SAB 118, companies are able to record a reasonable estimate of the impacts of the Tax Act if one is able to be determined and report it as a provisional amount during the measurement period. The measurement period is not to extend beyond one year from the enactment date. Impacts of the Tax Act that a company is not able to make a reasonable estimate for should not be recorded until a reasonable estimate can be made during the measurement period. 

In the three months ended December 31, 2017, the Company revised its estimated annual effective rate to reflect a change in the federal statutory rate from 35.0% to 28.1%. The change in statutory rate was made as a result of the Tax Act. The rate change is administratively effective as of the enactment date and the Company is using a blended rate of 28.1% for its fiscal year ending on June 30, 2018, as prescribed. In addition, in the three months ended December 31, 2017, the Company recognized tax expense related to adjusting its deferred tax balances to reflect the new corporate tax rate. Deferred tax amounts are calculated based on the rates at which they are expected to reverse in the future. The Company is analyzing certain aspects of the Tax Act and refining its calculations which could potentially affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the re-measurement of the Company’s deferred tax balance was $(20.3) million at December 31, 2017.

The Company’s effective tax rates for the three months ended December 31, 2017 and 2016 were 976.2% and 40.1%, respectively. The Company’s effective tax rates for the six months ended December 31, 2017 and 2016 were 4,449.3% and 40.1%, respectively. The effective tax rates for the three and six months ended December 31, 2017 and 2016 were higher than the U.S. statutory rates of 28.1% and 35.0%, respectively, primarily due to income tax expense of $(20.3) million resulting from the adjustment of deferred tax amounts due to enactment of the Tax Act.

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. After consideration of positive and negative evidence, including the recent history of income, the Company concluded that it is more likely than not that the Company will generate future income sufficient to realize the majority of the Company’s deferred tax assets.
As of December 31, 2017 and June 30, 2017 the Company had no unrecognized tax benefits.
As discussed in Note 2, the Company adopted ASU 2016-09 beginning July 1, 2017 and upon adoption recognized the excess tax benefits of $1.6 million as an increase to deferred tax assets and a corresponding increase to retained earnings.

30


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


Note 19. Net (Loss) Income Per Common Share 

Computation of EPS for the three and six months ended December 31, 2017 excludes the dilutive effect of 525,059 shares issuable under stock options, 37,414 PBRSUs and 383,611 shares issuable upon the assumed conversion of the outstanding Series A Preferred Stock because the Company incurred net losses in the three and six months ended December 31, 2017 so their inclusion would be anti-dilutive.
Computation of EPS for the three and six months ended December 31, 2016 includes the dilutive effect of 122,897 shares and 122,142 shares, respectively, issuable under stock options with exercise prices below the closing price of the Company’s common stock on the last trading day of the applicable period, but excludes the dilutive effect of 29,032 and 24,804 shares, respectively, issuable under stock options with exercise prices above the closing price of the Company’s common stock on the last trading day of the applicable period because their inclusion would be anti-dilutive.
 
 
Three Months Ended
December 31,
 
Six Months Ended
December 31,
(In thousands, except share and per share amounts)
 
2017
 
2016
 
2017
 
2016
Undistributed net (loss) income available to common stockholders
 
$
(18,887
)
 
$
20,052

 
$
(19,865
)
 
$
21,669

Undistributed net (loss) income available to nonvested restricted stockholders
 
(10
)
 
24

 
(10
)
 
25

Net (loss) income available to common stockholders—basic
 
$
(18,897
)
 
$
20,076

 
$
(19,875
)
 
$
21,694

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding—basic
 
16,723,498

 
16,584,106

 
16,711,660

 
16,573,545

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Shares issuable under stock options
 

 
122,897

 

 
122,142

Shares issuable PBRSUs
 

 

 

 

Shares issuable under convertible preferred stock
 

 

 

 

Weighted average common shares outstanding—diluted
 
16,723,498

 
16,707,003

 
16,711,660

 
16,695,687

Net (loss) income per common share available to common stockholders—basic
 
$
(1.13
)
 
$
1.21

 
$
(1.19
)
 
$
1.31

Net (loss) income per common share available to common stockholders—diluted
 
$
(1.13
)
 
$
1.20

 
$
(1.19
)
 
$
1.30


Note 20. Preferred Stock
The Company is authorized to issue 500,000 shares of preferred stock at a par value of $1.00, including 21,000 authorized shares of Series A Preferred Stock.
Series A Convertible Participating Cumulative Perpetual Preferred Stock
On October 2, 2017, the Company issued 14,700 shares of Series A Preferred Stock in connection with the Boyd Coffee acquisition. The Series A Preferred Stock pays an annual dividend, when, as and if declared by the Company’s Board of Directors, of 3.5% of the stated value per share payable in four quarterly installments in arrears, and has an initial stated value of $1,000 per share, adjustable up o