Changes in Accounting Principles and Corrections to Previously Issued Financial Statements

Effective June 30, 2018, the Company changed its method of accounting for its coffee, tea and culinary products from the LIFO basis to the FIFO basis. Total inventories accounted for utilizing the LIFO cost flow assumption represented 91% of the Company’s total inventories as of June 30, 2018 prior to this change in method. The Company believes that this change is preferable as it better matches revenues with associated expenses, aligns the accounting with the physical flow of inventory, and improves comparability with the Company’s peers.

Additionally, effective June 30, 2018, the Company implemented a change in accounting principle for freight costs incurred to transfer goods from a distribution center to a branch warehouse and warehousing overhead costs incurred to store and ready goods prior to their sale, from expensing such costs as incurred within selling expenses to capitalizing such costs as inventory and expensing through cost of goods sold. The Company has determined that it is preferable to capitalize such costs into inventory and expense through cost of goods sold because it better represents the costs incurred in bringing the inventory to its existing condition and location for sale to customers and it is consistent with the Company’s accounting treatment of similar costs.

In connection with these changes in accounting principles, subsequent to the issuance of the Company's consolidated financial statements for the fiscal year ended June 30, 2017, the Company determined that freight associated with certain non-coffee product lines ("allied") was incorrectly expensed as incurred in selling expenses, and the overhead variances and PPVs associated with these product lines were incorrectly expensed as incurred in cost of goods sold for the fiscal years ended June 30, 2017 and 2016 and for the first three quarters in the fiscal year ended June 30, 2018. These costs should have been capitalized as inventory costs in accordance with ASC 330, "Inventory." Accordingly, the Company has corrected the accompanying consolidated financial statements for the fiscal years ended June 30, 2017 and 2016 and the corresponding footnote disclosure of unaudited quarterly financial data for each of the quarters in the fiscal year ended June 30, 2017 and for the first three quarters in the fiscal year ended June 30, 2018, to capitalize the appropriate portion of these costs in ending inventory of each period and to reclassify remaining allied freight to cost of goods sold. Management has evaluated the materiality of these misstatements from quantitative and qualitative perspectives, including the impact on gross profit and income from operations, and has concluded that the misstatements are immaterial to the Company’s consolidated financial statements.

In accordance with SFAS No. 154, “Accounting Changes and Error Corrections,” the change in method of accounting for coffee, tea and culinary products and the change in accounting principle for freight and warehousing overhead costs have been retrospectively applied, and the corrections relating to the reclassification and capitalization of allied freight and the capitalization of allied overhead variances and PPVs have been made, to all prior periods presented herein.

The cumulative effect on retained earnings for these changes as of July 1, 2016 is $17.7 million.

The following table presents the impact of these changes on the Company’s consolidated balance sheet at June 30, 2017:



	June 30, 2017
(In thousands)	As Previously Reported			LIFO to FIFO Adjustment			Preferable Freight and Warehousing Adjustments			Corrections of Freight, Overhead Variances and PPVs			Retrospectively Adjusted
Inventories	$	56,251		$	19,675		$	3,821		$	43		$	79,790
Total current assets	$	117,164		$	19,675		$	3,821		$	43		$	140,703
Deferred income taxes	$	63,055		$	(7,625	)	$	(1,480	)	$	(17	)	$	53,933
Total assets	$	392,736		$	12,050		$	2,341		$	26		$	407,153
Retained earnings	$	221,182		$	13,444		$	2,341		$	26		$	236,993
Accumulated other comprehensive loss	$	(60,099	)	$	(1,394	)	$	—		$	—		$	(61,493	)
Total stockholders’ equity	$	215,135		$	12,050		$	2,341		$	26		$	229,552
Total liabilities and stockholders’ equity	$	392,736		$	12,050		$	2,341		$	26		$	407,153

The following tables present the impact of these changes on the Company's consolidated statements of operations for the fiscal years ended June 30, 2017 and 2016:



	Year Ended June 30, 2017
(In thousands, except per share data)	As Previously Reported		LIFO to FIFO Adjustment			Preferable Freight and Warehousing Adjustments			Corrections of Freight, Overhead Variances and PPVs			Retrospectively Adjusted
Cost of goods sold	$	327,765	$	1,739		$	19,835		$	5,283		$	354,622
Gross profit	$	213,735	$	(1,739	)	$	(19,835	)	$	(5,283	)	$	186,878
Selling expenses	$	157,198	$	—		$	(19,241	)	$	(4,628	)	$	133,329
Operating expenses	$	171,569	$	—		$	(19,241	)	$	(4,628	)	$	147,700
Income from operations	$	42,166	$	(1,739	)	$	(594	)	$	(655	)	$	39,178
Income before taxes	$	40,354	$	(1,739	)	$	(594	)	$	(655	)	$	37,366
Income tax expense	$	15,954	$	(663	)	$	(226	)	$	(250	)	$	14,815
Net income	$	24,400	$	(1,076	)	$	(368	)	$	(405	)	$	22,551
Net income available to common stockholders per common share—basic	$	1.46	$	(0.07	)	$	(0.02	)	$	(0.02	)	$	1.35
Net income available to common stockholders per common share—diluted	$	1.45	$	(0.07	)	$	(0.02	)	$	(0.02	)	$	1.34



	Year Ended June 30, 2016
(In thousands, except per share data)	As Previously Reported			LIFO to FIFO Adjustment			Preferable Freight and Warehousing Adjustments			Corrections of Freight, Overhead Variances and PPVs			Retrospectively Adjusted
Cost of goods sold	$	335,907		$	8,593		$	21,104		$	7,610		$	373,214
Gross profit	$	208,475		$	(8,593	)	$	(21,104	)	$	(7,610	)	$	171,168
Selling expenses	$	150,198		$	—		$	(20,502	)	$	(6,436	)	$	123,260
Operating expenses	$	200,296		$	—		$	(20,502	)	$	(6,436	)	$	173,358
Income (loss) from operations	$	8,179		$	(8,593	)	$	(602	)	$	(1,174	)	$	(2,190	)
Income (loss) before taxes	$	9,921		$	(8,593	)	$	(602	)	$	(1,174	)	$	(448	)
Income tax benefit	$	(79,997	)	$	6,430		$	450		$	878		$	(72,239	)
Net income	$	89,918		$	(15,023	)	$	(1,052	)	$	(2,052	)	$	71,791
Net income available to common stockholders per common share—basic	$	5.45		$	(0.91	)	$	(0.07	)	$	(0.12	)	$	4.35
Net income available to common stockholders per common share—diluted	$	5.41		$	(0.90	)	$	(0.07	)	$	(0.12	)	$	4.32

The following tables present the impact of these changes on the Company's consolidated statements of cash flows as of June 30, 2017 and 2016:



	June 30, 2017
(In thousands)	As Previously Reported			LIFO to FIFO Adjustment			Preferable Freight and Warehousing Adjustments			Corrections of Freight, Overhead Variances and PPVs			Retrospectively Adjusted
Net income	$	24,400		$	(1,076	)	$	(368	)	$	(405	)	$	22,551
Adjustments to reconcile net income to net cash provided by operating activities
Deferred income taxes	$	15,482		$	(663	)	$	(226	)	$	(250	)	$	14,343
Net losses (gains) on derivative instruments and investments	$	(205	)	$	2,566		$	—		$	—		$	2,361
Change in operating assets and liabilities:
Inventories	$	(8,504	)	$	(786	)	$	594		$	655		$	(8,041	)
Derivative assets (liabilities), net	$	2,305		$	(41	)	$	—		$	—		$	2,264
Net cash provided by operating activities	$	42,112		$	—		$	—		$	—		$	42,112



	June 30, 2016
(In thousands)	As Previously Reported			LIFO to FIFO Adjustment			Preferable Freight and Warehousing Adjustments			Corrections of Freight, Overhead Variances and PPVs			Retrospectively Adjusted
Net income	$	89,918		$	(15,023	)	$	(1,052	)	$	(2,052	)	$	71,791
Adjustments to reconcile net income to net cash provided by operating activities
Deferred income taxes	$	(80,314	)	$	6,430		$	450		$	878		$	(72,556	)
Net losses (gains) on derivative instruments and investments	$	12,910		$	3,626		$	—		$	—		$	16,536
Change in operating assets and liabilities:
Inventories	$	3,608		$	4,677		$	604		$	1,174		$	10,063
Derivative assets (liabilities), net	$	(10,583	)	$	288		$	—		$	—		$	(10,295	)
Net cash provided by operating activities	$	27,628		$	(2	)	$	2		$	—		$	27,628

The respective impacts to net income, retained earnings, accumulated other comprehensive income (loss) and total stockholders’ equity shown above have also been reflected in the consolidated statements of comprehensive income (loss) and stockholders’ equity for the fiscal years ended June 30, 2017 and 2016. The resulting impacts adjusted previously reported unrealized (losses) gains on derivative instruments designated as cash flow hedges, net of tax for the fiscal years ended June 30, 2017 and 2016 of $(2.9) million and $0.2 million, respectively, to $(2.9) million and $0.4 million, respectively. Losses (gains) on derivative instruments designated as cash flow hedges reclassified to cost of goods sold, net of tax increased from $(1.1) million and $8.1 million for the fiscal years ended June 30, 2017 and 2016, to $0.5 million and $10.3 million, respectively. Total comprehensive income, net of tax, for the fiscal years ended June 30, 2017 and 2016 decreased from $27.9 million and $86.7 million, respectively, to $27.6 million and $71.0 million, respectively.

If the Company had continued to account for coffee, tea and culinary product inventories under LIFO, the impact to the Company's balance sheet at June 30, 2018 would have been a decrease of $18.1 million in inventories, an increase of $4.2 million in deferred income taxes, a decrease of $17.5 million in retained earnings and an increase of $3.6 million in accumulated other comprehensive loss. The impact to the Company's consolidated statement of operations for the fiscal year ended June 30, 2018 would have been an decrease in cost of goods sold and an increase in gross profit, income from operations and income before taxes of $1.7 million, an additional income tax benefit of $0.9 million, an impact to net income of $2.6 million, and an increase of $0.15 in both basic and diluted earnings per common share available to common stockholders.

If the Company had continued to expense freight costs incurred to transfer goods from a distribution center to a branch warehouse and warehousing overhead costs, the impact to the Company's balance sheet at June 30, 2018 would have been a decrease of $5.9 million in inventories, an increase of $1.4 million in deferred income taxes and a decrease of $4.5 million in retained earnings. The impact to the Company's consolidated statement of operations for the fiscal year ended June 30, 2018 would have been a decrease in cost of goods sold and an increase in gross profit of $21.6 million, an increase in selling expenses of $23.7 million, a decrease in income from operations and income before taxes of $2.1 million, an additional income tax benefit of $1.0 million, an impact to net income of $3.1 million, and an increase of $0.19 in both basic and diluted earnings per common share available to common stockholders.