FARMER BROS. CO. Certain statements contained in this Quarterly Report on Form 10-Q are not based on historical fact and are forward-looking statements within the meaning of federal securities laws and regulations. These statements are based on management's current expectations, assumptions, estimates and observations of future events and include any statements that do not directly relate to any historical or current fact; actual results may differ materially due in part to the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedJune 30, 2019 filed with theSecurities and Exchange Commission (the "SEC") onSeptember 11, 2019 (the "2019 Form 10-K") and Part II, Item 1A of this report. These forward-looking statements can be identified by the use of words like "anticipates," "estimates," "projects," "expects," "plans," "believes," "intends," "will," "could," "assumes" and other words of similar meaning. Owing to the uncertainties inherent in forward-looking statements, actual results could differ materially from those set forth in forward-looking statements. We intend these forward-looking statements to speak only at the time of this report and do not undertake to update or revise these statements as more information becomes available except as required under federal securities laws and the rules and regulations of theSEC . Factors that could cause actual results to differ materially from those in forward-looking statements include, but are not limited to, duration of the COVID-19 pandemic's disruption to the Company's business and customers, levels of consumer confidence in national and local economic business conditions, the duration and magnitude of the pandemic's impact on unemployment rates, the success of the Company's strategy to recover from the effects of the pandemic, the success of the Company's turnaround strategy, the five key initiatives, the impact of capital improvement projects, the adequacy and availability of capital resources to fund the Company's existing and planned business operations and the Company's capital expenditure requirements, the relative effectiveness of compensation-based employee incentives in causing improvements in Company performance, the capacity to meet the demands of our large national account customers, the extent of execution of plans for the growth of Company business and achievement of financial metrics related to those plans, the success of the Company to retain and/or attract qualified employees, the success of the Company's adaptation to technology and new commerce channels, the effect of the capital markets as well as other external factors on stockholder value, fluctuations in availability and cost of green coffee, competition, organizational changes, the effectiveness of our hedging strategies in reducing price and interest rate risk, changes in consumer preferences, our ability to provide sustainability in ways that do not materially impair profitability, changes in the strength of the economy, business conditions in the coffee industry and food industry in general, our continued success in attracting new customers, variances from budgeted sales mix and growth rates, weather and special or unusual events, as well as other risks described in this report and other factors described from time to time in our filings with theSEC . The results of operations for the three and nine months endedMarch 31, 2020 are not necessarily indicative of the results that may be expected for any future period. Our Business We are a national coffee roaster, wholesaler and distributor of coffee, tea and culinary products manufactured under supply agreements, under our owned brands, as well as under private labels on behalf of certain customers. We were founded in 1912, incorporated inCalifornia in 1923, and reincorporated inDelaware in 2004. In fiscal 2017, we completed the relocation of our corporate headquarters fromTorrance, California toNorthlake ,Texas . We operate in one business segment. We serve a wide variety of customers, from small independent restaurants and foodservice operators to large institutional buyers like restaurants, department and convenience store chains, hotels, casinos, healthcare facilities, and gourmet coffee houses, as well as grocery chains with private brand and consumer-branded coffee and tea products, and foodservice distributors. Through our sustainability, stewardship, environmental efforts, and leadership we are not only committed to serving the finest products available, considering the cost needs of the customer, but also insist on their sustainable cultivation, manufacture and distribution whenever possible. Our product categories consist of a robust line of roast and ground coffee, including organic, Direct Trade, Project D.I.R.E.C.T. and other sustainably-produced offerings; frozen liquid coffee; flavored and unflavored iced and hot teas; culinary products including gelatins and puddings, soup bases, dressings, gravy and sauce mixes, pancake and biscuit mixes, jellies and preserves, and coffee-related products such as coffee filters, sugar and creamers; spices; and other beverages including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee. We offer a comprehensive approach to our customers by providing not only a breadth of high-quality products, but also value added services such as market insight, beverage planning, and equipment placement and service. We operate production facilities inNorthlake ,Texas ;Houston, Texas ;Portland, Oregon ; andHillsboro, Oregon . Distribution takes place out of theNorthlake facility,Texas , thePortland andHillsboro facilities, as well as separate distribution centers inNorthlake, Illinois andMoonachie, New Jersey . Our products reach our customers primarily in the following ways: 37 -------------------------------------------------------------------------------- through our nationwide Direct-store-delivery ("DSD") network of approximately 260 delivery routes and 100 branch warehouses as ofMarch 31, 2020 , or direct-shipped via common carriers or third-party distributors. DSD sales are made "off-truck" to our customers at their places of business. We operate a large fleet of trucks and other vehicles to distribute and deliver our products, and we rely on third-party logistics service providers for our long-haul distribution. Impact of the COVID-19 Pandemic on Our Business The COVID-19 pandemic has significantly impacted our financial position, results of operations, cash flows and liquidity as the spread of the pandemic and resulting governmental actions have decreased the demand for our products, most notably throughout our DSD network, which has had a material impact on our revenues during the quarter endedMarch 31, 2020 , and will have a material impact on our revenues in future periods. Our DSD customers consist of small independent restaurants, foodservice operators, large institutional buyers, and convenience store chains, hotels, casinos, healthcare facilities, and foodservice distributors. Some customers have either limited operations, or have closed their doors in compliance with the restrictive measures enacted by federal, states and local governments restrictions on social distancing. Thus, our DSD sales channel weekly revenue from these customers during this pandemic period have declined by 65% to 70% from the pre COVID-19 pandemic weeks. Even though we have proactively responded with new concepts such as, warehouse and pop-up sales, and accelerated our roastery direct and e-commerce initiatives, we do not expect these efforts to be able to offset the material decline in DSD revenue. Therefore, we have instituted certain initiatives to reduce operating expenses and capital expenditures to help mitigate the significant negative impact of our DSD revenue decline. Specifically, we have, among other things; • reduced headcount and furloughed significant percentage of the remaining
employees;
• eliminated fiscal third quarter 2020 cash compensation for our Board of
Directors;
• temporarily decreased executive leadership, corporate team member's and
all exempt employees (except route sales representatives) base salaries by
instituting a 15% reduction;
• reduced discretionary spending, including a moratorium on all travel;
• reduced fiscal year ending 2020 management incentive bonus program;
• reduced plant production costs in two of our plants;
• suspended 401k cash matching for all eligible employees;
• reduced capital expenditures while also closely managing inventory and
other spending;
• implemented cost controls throughout our coffee brewing equipment ("CBE")
program service network;
• instituted cost savings to reduce our general and administrative expenses;
• reduced our DSD supply chain network costs by reducing freight and fleet,
and consolidating routes; and
• commenced negotiations with landlords on rent, operating expenses and leases.
We expect the above initiatives to result in significant monthly costs savings during the duration of the initiatives. The duration of the initiatives will depend on the length of the COVID-19 pandemic related impacts on our business and the method of ramp up of DSD after the COVID-19 pandemic. On the other hand, our Direct Ship sales channel, which includes our retail business and key grocery stores under their private labels, as well as third party e-commerce platforms, have seen significant increases in demand due to the COVID-19 pandemic as the general public has self-quarantined in their residences and purchased more of their food and beverage items from retail and grocery outlets. The magnitude of the COVID-19 pandemic, including the extent of the uncertain economic conditions resulting in weaker demand for our products, our financial position, results of operations and liquidity, which could be material, cannot be reasonably estimated at this time due to the rapid development and fluidity of the situation. It will be determined by the duration of the pandemic, its geographic spread, business disruptions and the overall impact on the global economy. Nevertheless, despite the uncertainty of the COVID-19 pandemic situation, we expect our results of operations to be adversely affected for the remaining part of our fiscal year endingJune 30, 2020 , and at least the first half of our fiscal year endingJune 30, 2021 . However, we expect that most of our revenue will recover slowly as the local and national governments eases social distancing restrictions; but there can be no assurance that we will be successful in returning to the pre COVID-19 pandemic levels of revenue or profitability. For other impacts of the COVID-19 pandemic, please see Liquidity section and Risk Factors described in Part II, Item IA of this report. 38 -------------------------------------------------------------------------------- Summary Overview of Three Months EndedMarch 31, 2020 Results of Operations During the three months endedMarch 31, 2020 , we experienced sales declines in our DSD and direct ship sales channels compared to the prior year period. Similar to what we experienced in the past few quarters, our DSD network continued to be negatively impacted by higher customer attrition, partially offset by sales to new customers. In addition, our DSD sales network was negatively impacted by the sale of our office coffee business inJuly 2019 and the COVID-19 pandemic. The impact of the COVID-19 pandemic on DSD revenues in the last two weeks ofMarch 2020 was approximately 65% to 70% decline from the pre-COVID pandemic sales run rates as the customer base had either limited operations, or had closed their doors in compliance with the federal, states and local governments restrictions on social distancing. The largest DSD revenue declines were from restaurants, hotels and casino channels, while demand from healthcare and C-stores channels were impacted less. Our direct ship channel sales were impacted by lower coffee volumes and changes in coffee prices for our cost plus customers offset by slightly favorable customer mix shift. During the three months endedMarch 31, 2020 , despite the decline in DSD volumes from the COVID-19 pandemic, gross margins increased by 2.2% to 29.4% from 27.2% compared to the same prior period mostly due to lower freight costs, lower CBE costs, improved production variances and lower reserves for slow moving inventories. Operating expenses increased by$37.1 million over the prior year quarter driven by impairment of goodwill and intangible assets of$42.0 million , partially offset by a$2.5 million decrease in selling expenses and a$2.5 million decrease in general and administrative expenses. Impairment of goodwill and intangible assets of$42.0 million in the three months endedMarch 31, 2020 , was primarily associated with the results of our annual impairment test as ofJanuary 31, 2020 , adjusted further by the impact of the COVID-19 pandemic that had a negative impact on the fair value of our assets. Operating expenses benefited from a COVID-19 pandemic related one-time credit for employee incentive cost due to the reversal of management incentive bonus accrual, partially offset by the COVID-19 pandemic related severance costs during the three months endedMarch 31, 2020 . During the three months endedMarch 31, 2020 , we completed the sale of two branch properties for an aggregate sale price of$1.6 million . Net cash proceeds from these assets sales were$1.5 million . We recognized a net gain on these asset sales of$1.1 million during three months endedMarch 31, 2020 . The proceeds from the sales gave us increased liquidity and flexibility. Our capital expenditures for the nine months endedMarch 31, 2020 were$13.1 million , representing lower maintenance capital spend of$10.6 million , a 56.9% reduction compared to the prior year period. These spending reductions were driven by several key initiatives put in place, including a focus on refurbished CBE equipment to drive cost savings, and reductions in purchase of machinery and equipment for theNorthlake ,Texas plant expansion. As ofMarch 31, 2020 , the outstanding debt on our revolver was$80.0 million , an increase of$10.0 million sinceDecember 31, 2019 and a decrease of$12.0 million sinceJune 30, 2019 . Additionally, our cash increased to$26.4 million as ofMarch 31, 2020 , compared to$7.0 million as ofJune 30, 2019 . These improvements in our liquidity provide additional financial and operational flexibility during the COVID-19 pandemic. 39 --------------------------------------------------------------------------------
Results of Operations
Financial Data Highlights (in thousands, except per share data and percentages)
Three Months Ended March 31, Favorable (Unfavorable) Nine Months Ended March 31, Favorable (Unfavorable)
2020 2019 Change % Change 2020 2019 Change % Change
Income Statement Data:
Net sales $ 129,139 $ 146,679 $ (17,540
) (12.0 )%
(7.4 )% Gross margin 29.4 % 27.2 % 2.2 % NM 29.2 % 31.1 % (1.9 )% NM Operating expenses as a % of sales 64.4 % 31.4 % (33.0 )% NM 36.2 % 32.8 % (3.4 )% NM Loss from operations$ (45,169 ) $ (6,102 ) $ (39,067 ) NM$ (29,407 ) $ (7,678 ) $ (21,729 ) NM Net loss$ (39,777 ) $ (51,749 ) $ 11,972 NM$ (27,369 ) $ (64,835 ) $ 37,466 57.8 % Net loss available to common stockholders per common share-basic$ (2.32 ) $ (3.05 ) $ 0.73
NM
NM Net loss available to common stockholders per common share-diluted$ (2.32 ) $ (3.05 ) $ 0.73 NM$ (1.62 ) $ (3.84 ) $ 2.22 NM Operating Data: Coffee pounds 25,678 27,873 (2,195 ) (7.9 )% 80,995 80,719 276 0.3 % EBITDA(1)$ (32,272 ) $ 639$ (32,911 ) NM$ (1,980 ) $ 2,109 $ (4,089 ) NM EBITDA Margin(1) (25.0 )% 0.4 % (25.4 )% NM (0.5 )% 0.5 % (1.0 )% NM
Adjusted EBITDA(1)
44.7 %$ 18,028 $ 27,945 $ (9,917 ) (35.5 )% Adjusted EBITDA Margin(1) 5.1 % 3.1 % 2.0 % NM 4.3 % 6.2 % (1.9 )% NM Percentage of Total Net Sales By Product Category Coffee (Roasted) 65.3 % 63.5 % 1.8 % 2.8 % 63.7 % 63.4 % 0.3 % 0.5 % Coffee (Frozen Liquid) 5.5 % 5.6 % (0.1 )% (1.8 )% 5.6 % 5.8 % (0.2 )% (3.4 )% Tea (Iced & Hot) 5.2 % 5.7 % (0.5 )% (8.8 )% 5.2 % 5.7 % (0.5 )% (8.8 )% Culinary 9.9 % 11.0 % (1.1 )% (10.0 )% 10.1 % 10.8 % (0.7 )% (6.5 )% Spice 4.1 % 3.9 % 0.2 % 5.1 % 4.2 % 3.9 % 0.3 % 7.7 % Other beverages(2) 9.5 % 9.8 % (0.3 )% (3.1 )% 10.1 % 9.9 % 0.2 % 2.0 % Other revenues(3) - % - % - % NM 0.6 % - % 0.6 % NM Net sales by product category 99.5 % 99.5 % - % NM 99.5 % 99.5 % (0.6 )% NM Fuel Surcharge 0.5 % 0.5 % - % NM 0.5 % 0.5 % - % NM Total 100.0 % 100.0 % - % NM 100.0 % 100.0 % (0.6 )% - % Other data: Capital expenditures related to maintenance$ 3,163 $ 4,434 $ (1,271 ) (28.7 )%$ 10,622 $ 17,001 $ (6,379 ) (37.5 )% Total capital expenditures$ 4,107 $ 7,273 $ (3,166 ) (43.5 )%$ 13,114 $ 30,393 $ (17,279 ) (56.9 )% Depreciation and amortization expense$ 7,333 $ 7,600 $ (267 ) (3.5 )%$ 22,544 $ 23,230 $ (686 ) (3.0 )% ________________ NM - Not Meaningful (1) EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin are non-GAAP financial measures. See " Non-GAAP Financial Measures " below for a reconciliation of these non-GAAP measures to their corresponding GAAP measures. (2) Includes all beverages other than roasted coffee, frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee. (3) Represents revenues for certain transition services related to the sale of our office coffee assets. 40
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The following table sets forth information regarding our condensed consolidated
results of operations for the three and nine months ended
Three Months Ended March 31, Favorable (Unfavorable) Nine Months Ended March 31, Favorable (Unfavorable)
2020 2019 Change % Change 2020 2019 Change % Change
Net sales $ 129,139 $ 146,679 $ (17,540 ) (12.0 )% $ 420,237 $ 453,892 $ (33,655 ) (7.4 )%
Cost of goods
sold 91,190 106,779 15,589 14.6 % 297,662 312,513 14,851 4.8 %
Gross profit 37,949 39,900 (1,951 ) (4.9 )% 122,575 141,379 (18,804 ) (13.3 )%
Selling expenses 31,968 34,422 2,454 7.1 % 100,488 111,323 10,835 9.7 %
General and
administrative
expenses 8,833 11,306 2,473 21.9 % 32,839 32,063 (776 ) (2.4 )%
Restructuring and
other transition
expenses - 26 26 100.0 % - 4,700 4,700 100.0 %
Net losses
(gains) from
sales of assets 287 248 (39 ) 15.7 % (23,375 ) 971 24,346 NM
Impairment of goodwill and intangible assets 42,030 - (42,030 ) - % 42,030 - (42,030 ) - % Operating expenses 83,118 46,002 (37,116 ) (80.7 )% 151,982 149,057 (2,925 ) (2.0 )% Loss from operations (45,169 ) (6,102 ) (39,067 ) NM (29,407 ) (7,678 ) (21,729 ) (283.0 )% Other (expense) income: Interest expense (2,478 ) (2,981 ) 503 16.9 % (7,885 ) (9,165 ) 1,280 14.0 % Postretirement benefits curtailment and pension settlement charge 5,760 - 5,760 NM 5,760 (10,948 ) 16,708 (152.6 )% Other, net 1,076 495 581 117.4 % 2,941 2,105 836 39.7 % Total other income (expense) 4,358 (2,486 ) 6,844 275.3 % 816 (18,008 ) 18,824 (104.5 )% Loss before taxes (40,811 ) (8,588 ) (32,223 ) (375.2 )% (28,591 ) (25,686 ) (2,905 ) (11.3 )% Income tax (benefit) expense (1,034 ) 43,161 44,195 (102.4 )% (1,222 ) 39,149 40,371 103.1 % Net loss$ (39,777 ) $ (51,749 ) 11,972 23.1 %$ (27,369 ) $ (64,835 ) 37,466 57.8 % Less: Cumulative preferred dividends, undeclared and unpaid 139 134 (5 ) (3.7 )% 414 400 (14 ) (3.5 )% Net loss available to common stockholders$ (39,916 ) $ (51,883 ) 11,967 23.1 %$ (27,783 ) $ (65,235 ) 37,452 57.4 % _____________ NM - Not Meaningful 41
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Three and Nine Months Ended
Net Sales The following table presents changes in units sold, unit price and net sales by product category in the three and nine months endedMarch 31, 2020 compared to the same periods in the prior fiscal year (in thousands, except unit price and percentages): Three Months Ended March 31, Favorable (Unfavorable) Nine Months Ended March 31, Favorable (Unfavorable) 2020 2019 Change % Change 2020 2019 Change % Change Units sold Coffee (Roasted) 20,542 22,298 (1,756 ) (7.9 )% 64,796 64,575 221 0.3 % Coffee (Frozen Liquid) 83 101 (18 ) (17.8 )% 281 336 (55 ) (16.4 )% Tea (Iced & Hot) 650 740 (90 ) (12.2 )% 1,998 2,097 (99 ) (4.7 )% Culinary 1,584 1,986 (402 ) (20.2 )% 5,376 6,186 (810 ) (13.1 )% Spice 140 162 (22 ) (13.6 )% 479 552 (73 ) (13.2 )% Other beverages(1) 828 1,100 (272 ) (24.7 )% 3,225 4,009 (784 ) (19.6 )% Total 23,827 26,387 (2,560 ) (9.7 )% 76,155 77,755 (1,600 ) (2.1 )% Unit Price Coffee (Roasted) $ 4.10$ 4.18 $ (0.08 ) (1.9 )% $ 4.16$ 4.46 $ (0.30 ) (6.7 )% Coffee (Frozen Liquid) $ 84.87$ 81.85 $ 3.02 3.7 % $ 83.73$ 77.80 $ 5.93 7.6 % Tea (Iced & Hot) $ 10.31$ 11.24 $ (0.93 ) (8.3 )% $ 11.00$ 12.34 $ (1.34 ) (10.9 )% Culinary $ 8.18$ 8.05 $ 0.13 1.6 % $ 8.02$ 7.89 $ 0.13 1.6 % Spice $ 37.59$ 35.39 $ 2.20
6.2 % $ 36.73
TotalNet Sales By Product Category(2) Coffee (Roasted)$ 84,300 $ 93,211 $ (8,911 ) (9.6 )%$ 269,367 $ 287,851 $ (18,484 ) (6.4 )% Coffee (Frozen Liquid) 7,044 8,267 (1,223 ) (14.8 )% 23,528 26,141 (2,613 ) (10.0 )% Tea (Iced & Hot) 6,701 8,320 (1,619 ) (19.5 )% 21,969 25,876 (3,907 ) (15.1 )% Culinary 12,954 15,990 (3,036 ) (19.0 )% 43,099 48,779 (5,680 ) (11.6 )% Spice 5,262 5,736 (474 ) (8.3 )% 17,594 17,895 (301 ) (1.7 )% Other beverages(1) 12,290 14,405 (2,115 ) (14.7 )% 42,681 44,946 (2,265 ) (5.0 )% Net sales by product category$ 128,551 $ 145,929 $ (17,378 ) (11.9 )%$ 418,238 $ 451,488 $ (33,250 ) (7.4 )% Fuel Surcharge 588 750 (162 ) (21.6 )% 1,999 2,404 (405 ) (16.8 )% Total$ 129,139 $ 146,679 $ (17,540 ) (12.0 )%$ 420,237 $ 453,892 $ (33,655 ) (7.4 )% ____________ (1) Includes all beverages other than roasted coffee, frozen liquid coffee, and iced and hot tea, including cappuccino, cocoa, granitas, and concentrated and ready-to-drink cold brew and iced coffee. (2) Certain transition service revenues related to the sale of our office coffee assets are not separately presented. The amounts are included in each of the product categories. 42
-------------------------------------------------------------------------------- Net sales in the three months endedMarch 31, 2020 decreased$17.5 million , or 12.0%, to$129.1 million from$146.7 million in the three months endedMarch 31, 2019 . The decline in net sales was primarily due to a decline in revenues and volume of green coffee processed and sold through our DSD network, a decrease in net sales from tea and culinary products, and the impact of changes in coffee prices for our cost plus customers. Sales through our DSD network were impacted by the sale of our office coffee business in July of 2019, net customer attrition and the impact of the COVID-19 pandemic in the latter part of the quarter. Our direct ship sales declined slightly compared to the prior year period driven by lower coffee volumes and changes in coffee prices for our cost plus customers offset by slightly favorable customer mix shift. Net sales in the three months endedMarch 31, 2020 included$2.6 million in price decreases to customers utilizing commodity-based pricing arrangements, where the changes in the green coffee commodity costs are passed on to the customer, as compared to$2.1 million in price decreases to customers utilizing such arrangements in the three months endedMarch 31, 2019 . In the next quarter endingJune 30, 2020 , we expect a material decline in revenue due to the impact of the COVID-19 pandemic on our DSD customers. Net sales in the nine months endedMarch 31, 2020 decreased$33.7 million , or 7.4%, to$420.2 million from$453.9 million in the nine months endedMarch 31, 2019 . The decline in net sales was primarily due to a decline in revenues and volume of green coffee processed and sold through our DSD network, a decrease in net sales from tea and culinary products, unfavorable customer mix within our direct ship sales, non-recurring sales of industrial soup based products associated with the Boyd's acquisition which we stopped selling last year, and the impact of changes in coffee prices for our cost plus customers. Sales through our DSD network were impacted by the sale of our office coffee business in July of 2019, higher customer attrition, impact of the COVID-19 pandemic in the latter part ofMarch 2020 and lower inventory fill rates associated with downtime at ourHouston plant during the earlier part of the current period. Net sales in the nine months endedMarch 31, 2020 included$7.6 million in price decreases to customers utilizing commodity-based pricing arrangements, where the changes in the green coffee commodity costs are passed on to the customer, as compared to$5.1 million in price decreases to customers utilizing such arrangements in the nine months endedMarch 31, 2019 . The following table presents the effect of changes in unit sales, unit pricing and product mix in the three and nine months endedMarch 31, 2020 compared to the same periods in the prior fiscal year (in millions): Three Months Ended Nine Months Ended March 31, 2020 vs. % of Total Mix March 31, % of Total Mix 2019 Change 2020 vs. 2019 Change Effect of change in unit sales $ (13.8 ) (78.9 )% $ (8.8 ) (26.1 )% Effect of pricing and product mix changes (3.7 ) (21.1 )% (24.9 ) (73.9 )% Total decrease in net sales $ (17.5 ) (100.0 )% $ (33.7 ) (100.0 )% Unit sales decreased 9.7% and average unit price declined by 2.4% in the three months endedMarch 31, 2020 as compared to the same period in the prior fiscal year, resulting in a decrease in net sales of 12.0%. Unit sales decreased 2.1% and average unit price decreased by 5.5% in the nine months endedMarch 31, 2020 as compared to the same period in the prior fiscal year, resulting in a decrease in net sales of 7.4%. Average unit price decreased during three and nine months endedMarch 31, 2020 due to a higher mix of product sold via direct ship versus DSD network, as direct ship has a lower average unit price. There were no new product category introductions in the three and nine months endedMarch 31, 2020 or 2019, which had a material impact on our net sales. Gross Profit Gross profit in the three months endedMarch 31, 2020 decreased$2.0 million , or 4.9%, to$37.9 million from$39.9 million in the three months endedMarch 31, 2019 . Gross margin increased to 29.4% in the three months endedMarch 31, 2020 from 27.2% in the three months endedMarch 31, 2019 . Gross profit in the nine months endedMarch 31, 2020 decreased$18.8 million , or 13.3%, to$122.6 million from$141.4 million in the nine months endedMarch 31, 2019 . Gross margin decreased to 29.2% in the nine months endedMarch 31, 2020 from 31.1% in the nine endedMarch 31, 2019 . The decrease in gross profit in the three and nine months endedMarch 31, 2020 was primarily driven by lower net sales of$17.5 million and$33.7 million , respectively, partially offset by lower costs of goods sold. Gross margin for the three months 43 -------------------------------------------------------------------------------- endedMarch 31, 2020 was positively impacted by lower freight costs, lower CBE costs, improved production variances and lower reserves for slow moving inventories. Gross margin during the nine months endedMarch 31, 2020 was negatively impacted by unfavorable customer mix and higher reserves for slow moving inventories, partially offset by lower freight costs, lower CBE costs, improved production variances and the impact of changes in coffee prices during the nine months endedMarch 31, 2020 . In the next quarter endingJune 30, 2020 , we expect a material decline in our margin due to customer mix and the impact of the COVID-19 pandemic on DSD customers. Operating Expenses In the three months endedMarch 31, 2020 , operating expenses increased$37.1 million , or 80.7%, to$83.1 million , or 64.4% of net sales, from$46.0 million , or 31.4% of net sales, in the three months endedMarch 31, 2019 , due to impairments of goodwill and intangible assets of$42.0 million , partially offset by a$2.5 million decrease in selling expenses and a$2.5 million decrease in general and administrative expenses. The decrease in selling expenses was primarily driven by efficiencies realized from DSD route optimization, lower DSD sales commissions and lower travel expenses. The decrease in general and administrative expenses was associated primarily with reductions in third party costs, the absence ofBoyd Coffee integration costs and one-time credit for employee incentive cost due to the reversal of management incentive bonus accrual, partially offset by the COVID-19 pandemic related severance costs during the three months endedMarch 31, 2020 . Impairment of goodwill and intangible assets of$42.0 million in the three and nine months endedMarch 31, 2020 , was primarily associated with our annual impairment test as ofJanuary 31, 2020 , adjusted further by the impact of the COVID-19 pandemic that had a negative impact on the fair value of the assets. See Note 9 , Goodwill and Intangible Assets, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report. In the nine months endedMarch 31, 2020 , operating expenses increased$2.9 million , or 2.0%, to$152.0 million , or 36.2% of net sales, from$149.1 million , or 32.8% of net sales, in the nine months endedMarch 31, 2019 , primarily due to impairment write-down of goodwill and intangible assets of$42.0 million and a$0.8 million increase in general and administrative expenses, partially offset by a$24.3 million increase in net gains from sales of assets, a$10.8 million decrease in selling expenses and the absence of$4.7 million in restructuring and other transition expenses. The decrease in selling expenses was primarily due to headcount reductions, the conclusion ofBoyd Coffee integration at the beginning ofOctober 2018 and other efficiencies realized from DSD route optimization. The increase in general and administrative expenses was associated primarily with severance costs, employee incentive and benefit costs and proxy contest expenses incurred during the nine months endedMarch 31, 2020 . Net gains from sales of assets in the nine months endedMarch 31, 2020 were primarily associated with the sales of the Houston Property, the office coffee assets and seven branch properties of$7.3 million ,$7.2 million and$12.3 million , respectively. Total Other Income (Expense) Total other income (expense) in the three months endedMarch 31, 2020 was$4.4 million of income compared to$2.5 million of expense in the three months endedMarch 31, 2019 . Total other expense in the nine months endedMarch 31, 2020 was$0.8 million of income compared to$18.0 million of expense in the nine months endedMarch 31, 2019 . The change in total other income (expense) in the three and nine months endedMarch 31, 2020 was primarily a result of; • postretirement medical curtailment gains in the current period;
• pension settlement charge in prior period;
• reduced employee postretirement benefit gains;
• lower interest expense; and
• lower net losses on coffee-related derivative instruments in the three and
nine months ended
InMarch 2020 , we announced the termination of our postretirement medical benefit plan effectiveJanuary 1, 2021 . The announcement triggered a re-measurement, and resulted in curtailment gains of$5.8 million in the three and nine months endedMarch 31, 2020 . The pension settlement charge incurred in the nine months endedMarch 31, 2019 of$10.9 million was due to the termination of theFarmer Bros. Co. Pension Plan for Salaried Employees effectiveDecember 1, 2018 . 44 -------------------------------------------------------------------------------- Interest expense in the three months endedMarch 31, 2020 decreased$0.5 million to$2.5 million from$3.0 million in the prior year period. Interest expense in the nine months endedMarch 31, 2020 decreased$1.3 million to$7.9 million from$9.2 million in the prior year period. The decrease in interest expense in the three and nine months endedMarch 31, 2020 was principally due to lower pension interest expense and lower borrowings on our credit facility. This was partially offset in the nine months endedMarch 31, 2020 by a$0.4 million of realized loss from the partial unwinding of our interest rate swap notional amount from$80.0 million to$65.0 million . Other, net in the three months endedMarch 31, 2020 increased by$0.6 million to$1.1 million compared to$0.5 million in the prior year period. Other, net in the nine months endedMarch 31, 2020 increased by$0.8 million to$2.9 million compared to$2.1 million in the prior year period. The increase in Other, net was primarily a result of lower mark-to-market net losses on coffee-related derivative instruments not designated as accounting hedges in the three and nine months endedMarch 31, 2020 compared same prior year period. Income Taxes In the three and nine months endedMarch 31, 2020 , we recorded income tax benefit of$1.0 million and$1.2 million , respectively, compared to income expense of$43.2 million and$39.1 million in the three and nine months endedMarch 31, 2019 , respectively. The tax benefit is primarily due to the previously recorded valuation allowance and change in our estimated deferred tax liability during the three and nine months endedMarch 31, 2020 as compared to the prior year period. See Note 16 , Income Taxes, of the Notes to Unaudited Condensed Consolidated Financial Statements included in Part I, Item 1 of this report. 45 -------------------------------------------------------------------------------- Non-GAAP Financial Measures In addition to net (loss) income determined in accordance withU.S. generally accepted accounting principles ("GAAP"), we use the following non-GAAP financial measures in assessing our operating performance: "EBITDA" is defined as net (loss) income excluding the impact of: • income taxes; • interest expense; and
• depreciation and amortization expense.
"EBITDA Margin" is defined as EBITDA expressed as a percentage of net sales. "Adjusted EBITDA" is defined as net (loss) income excluding the impact of: • income taxes;
• interest expense;
• (loss) income from short-term investments;
• depreciation and amortization expense;
• ESOP and share-based compensation expense;
• non-cash impairment losses;
• non-cash pension withdrawal expense;
• restructuring and other transition expenses;
• severance costs; • proxy related expenses;
• non-recurring costs associated with the COVID-19 pandemic;
• net gains and losses from sales of assets;
• non-cash pension and postretirement benefits; and
• acquisition and integration costs.
"Adjusted EBITDA Margin" is defined as Adjusted EBITDA expressed as a percentage of net sales. Restructuring and other transition expenses are expenses that are directly attributable to (i) employee retention and separation benefits, pension withdrawal expense, facility-related costs and other related costs such as travel, legal, consulting and other professional services; and (ii) severance, prorated bonuses for bonus eligible employees, contractual termination payments and outplacement services, and other related costs, including legal, recruiting, consulting, other professional services, and travel. For purposes of calculating EBITDA and EBITDA Margin and Adjusted EBITDA and Adjusted EBITDA Margin, we have excluded the impact of interest expense resulting from the adoption of ASU 2017-07, non-cash pretax pension and postretirement benefits resulting from the amendment and termination of theFarmer Bros . pension and postretirement benefits plans and severance because these items are not reflective of our ongoing operating results. We believe these non-GAAP financial measures provide a useful measure of the Company's operating results, a meaningful comparison with historical results and with the results of other companies, and insight into the Company's ongoing operating performance. Further, management utilizes these measures, in addition to GAAP measures, when evaluating and comparing the Company's operating performance against internal financial forecasts and budgets. We believe that EBITDA facilitates operating performance comparisons from period to period by isolating the effects of certain items that vary from period to period without any correlation to core operating performance or that vary widely among similar companies. These potential differences may be caused by variations in capital structures (affecting interest expense), tax positions (such as the impact on periods or companies of changes in effective tax rates or net operating losses) and the age and book depreciation of facilities and equipment (affecting relative depreciation expense). We also present EBITDA and EBITDA Margin because (i) we believe that these measures are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry, (ii) we believe that investors will find these measures useful in assessing 46 -------------------------------------------------------------------------------- our ability to service or incur indebtedness, and (iii) we use these measures internally as benchmarks to compare our performance to that of our competitors. EBITDA, EBITDA Margin, Adjusted EBITDA and Adjusted EBITDA Margin, as defined by us, may not be comparable to similarly titled measures reported by other companies. We do not intend for non-GAAP financial measures to be considered in isolation or as a substitute for other measures prepared in accordance with GAAP. Set forth below is a reconciliation of reported net income (loss) to EBITDA (unaudited): Three Months Ended March 31, Nine Months Ended March 31, (In thousands) 2020 2019 2020 2019 Net loss, as reported$ (39,777 ) $ (51,749 ) $ (27,369 ) $ (64,835 ) Income tax (benefit) expense (1,034 ) 43,161 (1,222 ) 39,149 Interest expense (1) 1,206 1,627 4,067 4,565 Depreciation and amortization expense 7,333 7,600 22,544 23,230 EBITDA$ (32,272 ) $ 639$ (1,980 ) $ 2,109 EBITDA Margin (25.0 )% 0.4 % (0.5 )% 0.5 % ____________ (1) Excludes interest expense related to pension plans and postretirement benefits. Set forth below is a reconciliation of reported net income (loss) to Adjusted EBITDA (unaudited): Three Months Ended March 31, Nine Months Ended March 31, (In thousands) 2020 2019 2020 2019 Net loss, as reported$ (39,777 ) $ (51,749 ) $ (27,369 ) $ (64,835 ) Income tax (benefit) expense (1,034 ) 43,161 (1,222 ) 39,149 Interest expense(1) 1,206 1,627 4,067 4,565 Depreciation and amortization 7,333 22,544 23,230 expense 7,600 ESOP and share-based compensation 1,418 3,197 3,095 expense 1,238 Restructuring and other - - 4,700 transition expenses(2) 26 Net losses (gains) from sales of 287 (23,375 ) 971 other assets 248 Impairment of goodwill and 42,030 42,030 - intangible assets - Non-recurring costs associated with the COVID-19 pandemic 129 - 129 - Proxy contest-related expenses 204 - 463 - Acquisition and integration costs - 2,384 - 6,122 Postretirement benefits (5,760 ) (5,760 ) 10,948 curtailment and pension settlement charge - Severance 527 - 3,324 - Adjusted EBITDA$ 6,563 $ 4,535 $ 18,028 $ 27,945 Adjusted EBITDA Margin 5.1 % 3.1 % 4.3 % 6.2 % ____________ (1) Excludes interest expense related to pension plans and postretirement benefits. (2) The nine months endedMarch 31, 2019 , includes$3.4 million , including interest, assessed by theWC Pension Trust representing the Company's share of the Western Conference of Teamsters Pension Plan ("WCTPP") unfunded benefits due to the Company's partial withdrawal from the WCTPP as a result of employment actions taken by the Company in 2016 in connection with the Corporate Relocation Plan. 47
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Liquidity, Capital Resources and Financial Condition The following table summarizes our debt obligations:
March 31, 2020 June 30, 2019 Debt Original Origination Borrowing
Weighted Average Carrying Weighted Average (In thousands) Date Maturity Amount Carrying Value
Interest Rate Value Interest Rate
Credit Facility Revolver 11/6/2023 N/A $ 80,000 4.45 % $ 92,000 3.98 %
Revolving Credit Facility
In March 2020 , pursuant to Amendment No. 2 to Amended and Restated Credit
Agreement (the "Second Amendment") we amended our existing senior secured
revolving credit facility (such facility as amended to date, including pursuant
to the Second Amendment, the "Amended Revolving Facility") with Bank of America,
N.A , Citibank, N.A ., JPMorgan Chase Bank, N.A ., PNC Bank, National Association ,
Regions Bank , and SunTrust Bank . The Amended Revolving Facility, amongst other
things (described in more detail above) decreased the size of the revolving
credit facility to $125.0 million from $150.0 million but retained most of its
previous terms including the sublimit on letters of credit and swingline loans
of $15.0 million each. The commitment fee is based on a leverage grid and ranges
from 0.20% to 0.50%. Borrowings under the Amended Revolving Facility bear
interest on base rate loans based on a leverage grid with a range of PRIME +
0.50% to 2.50%, and on Eurodollar loans based on a leverage grid with a range of
Adjusted LIBO Rate + 1.50% to 3.50%. Effective March 27, 2019 , we entered into
an interest rate swap to manage our interest rate risk on our floating-rate
indebtedness. See Note 4 for details.
Under the Amended Revolving Facility, we are subject to a variety of affirmative
and negative covenants of types customary in a senior secured lending facility,
including financial covenants relating to leverage, interest expense coverage
and (until the quarter ending December 31, 2021 ) minimum adjusted EBITDA. We are
allowed to pay dividends, provided, among other things, a total net leverage
ratio is met, and no default exists or has occurred and is continuing as of the
date of any such payment and after giving effect thereto. The Amended Revolving
Facility has no scheduled payback required on the principal prior to the
maturity date on November 6, 2023 .
At April 30, 2020 , we had outstanding borrowings of $122.0 million and utilized
$2.3 million of the letters of credit sublimit under the Amended Revolving
Facility. The amount available to borrow is subject to compliance with the
applicable financial covenants set out under the Amended Revolving Facility
(described in more detail below).
Liquidity
We generally finance our operations through cash flows from operations and borrowings under our Amended Revolving facility described above. In fiscal 2018, we filed a shelf registration statement with theSEC which allows us to issue unspecified amounts of common stock, preferred stock, depository shares, warrants for the purchase of shares of common stock or preferred stock, purchase contracts for the purchase of equity securities, currencies or commodities, and units consisting of any combination of any of the foregoing securities, in one or more series, from time to time and in one or more offerings up to a total dollar amount of$250.0 million . In light of our financial position, operating performance and current economic conditions, including the state of the global capital markets, there can be no assurance as to whether or when we will be able to raise capital by issuing securities pursuant to our effective shelf registration statement or otherwise The Amended Revolving Facility includes financial covenants with respect to leverage and interest expense that are tested each fiscal quarter. The ratio of consolidated total indebtedness (net of unrestricted cash up to$7.5 million ) to adjusted EBITDA (as defined in the Amended Revolving Facility) must not exceed 4.0 to 1.0 atJune 30, 2020 , 4.75 to 1.0 atSeptember 30, 2020 , 5.25 to 1.0 atDecember 31, 2020 , 5.75 to 1.0 atMarch 31, 2021 , 5.25 to 1.0 atJune 30, 2021 , 4.75 to 1.0 atSeptember 30, 2021 , 4.25 to 1.0 atDecember 31, 2021 and 3.5 to 1.0 thereafter. Additionally, the Amended Revolving Facility requires that, as at each fiscal quarter end commencingJune 30, 2020 and endingDecember 31, 2021 , adjusted EBITDA (as defined in the Amended Revolving Facility) must not be less than the applicable amount set out in the Amended Revolving Facility. The ratio of adjusted EBITDA (as defined in the Amended Revolving Facility) to consolidated interest expense must not be less than 3.0 to 1.0. 48 --------------------------------------------------------------------------------
At
Impact of COVID-19 on Our Liquidity As ofMarch 31, 2020 , were in compliance with our covenants under the Amended Revolving Facility. InApril 2020 , we borrowed an additional$42.0 million under our Amended Revolving Facility. We increased our borrowings as a proactive measure to increase our cash position and preserve financial flexibility in light of the current uncertainty in the global markets resulting from the COVID-19 pandemic. However, our liquidity position continues to deteriorate as our revenues from operating activities decline due to the impacts from the COVID-19 pandemic. This COVID-19 pandemic and related restrictive measures such as travel bans, quarantines, shelter-in-place orders, and shutdowns as well as changes in recent consumer behavior, have had an adverse impact on certain of our DSD customers, particularly restaurants, hotels, casinos and coffeehouses. Many of these customers have been forced to close or curtail operations, and are purchasing at reduced volumes, if at all. We are unable to predict the rate at which these customers will resume operations and purchases as the restrictive measures are lifted. As a result, sales from our DSD customers have declined between 65% to 70% from pre COVID-19 average sales. We do not expect to see a meaningful improvement in our operating results until federal, state and local government authorities ease the restrictive measures. Due to these factors, the degree to which the COVID-19 pandemic impacts our results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including, but not limited to, the duration and spread of the pandemic, its severity, the actions to contain the pandemic or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume, as well as our effectiveness on serving our customer base and acquiring new customers. Therefore, with the uncertainty around the duration and breadth of the COVID-19 pandemic, the ultimate impact on our business, financial condition or operating results cannot be reasonably estimated at this time. Absent a significant recovery and our ability to successfully scale operations and production accordingly, we are projecting potential violations of our financial covenants under the Amended Revolving Facility as ofJune 30, 2020 , which would place us in an event of default. The occurrence of a default would permit our lenders to declare as due all amounts outstanding under our Amended Credit Facility which total$122.0 million as ofMay 7, 2020 . We do not have sufficient cash on hand or available liquidity that can be utilized to repay the total outstanding debt in the event of a default. In addition, the occurrence of a default could cause cross defaults and accelerations under our other indebtedness. Due to these factors, we have modified our business practices. To navigate through this period of uncertainty, we have reduced discretionary expenses, aggressively reduced capital expenditures, closely and proactively managed our inventory purchases, while prioritizing investments in e-commerce initiatives and serving current Direct Ship customers' needs. Additionally, we also continue to be focused on the rebalancing of volume across our manufacturing network, bringing additional production into ourNorthlake ,Texas facility to generate additional savings. Among others things, we have already taken the following actions: • reduced headcount and furloughed a significant percentage of the remaining
employees;
• eliminated fiscal third quarter 2020 cash compensation for our Board of
Directors;
• temporarily decreased executive leadership, corporate team members' and
all exempt employees' (except route sales representatives) base salaries
by 15%;
• reduced discretionary spending, including a moratorium on all travel;
• reduced fiscal year ending 2020 management incentive bonus program;
• reduced plant production costs in two of our plants;
• suspended 401(k) cash matching for all eligible employees;
• reduced capital expenditures while also closely managing inventory and
other spending;
• implemented cost controls throughout our coffee brewing equipment ("CBE")
program service network;
• instituted cost savings to reduce our selling, general and administrative
expenses;
• reduced our DSD supply chain network costs by reducing freight, and fleet,
and consolidating routes; and
• commenced negotiations with certain landlords on rent, operating expenses
and leases.
We expect these actions will improve our cost structure to mitigate the impact of the COVID-19 pandemic on our operating results and liquidity, however we cannot make assurances that these actions will be successful. Absent other actions, we would likely default under our Amended Revolving Facility as discussed above. As a result, we are exploring several different
49
--------------------------------------------------------------------------------opportunities and access to various capital markets to provide additional near-term liquidity. These options, among others, include: • apply for the Main Street Lending program of the CARES Act;
• unlock liquidity of certain of our real estate assets through sale
leaseback or sale of excess real estate;
• seek additional financing in the debt or equity markets; or
• refinance or restructure all or a portion of our indebtedness.
We are currently pursuing with our lenders a waiver agreement or forbearance arrangement related to projected covenant violations under our Amended Revolving Facility. We obtained an amendment from our lenders inMarch 2020 , and based on the current debt market environment and other factors, management believes that a waiver or forbearance will be approved to avoid acceleration of our debt. We believe one or more of these options, along with the actions already taken to modify our business practices and reduce costs, will provide us the liquidity and flexibility we need to continue to operate and meet our obligations as they come due for the next 12 months. However, there can be no assurance that we will be able to execute on one or more of the above options, that our cost saving measures will be effective or that we will be able to avoid a breach of the covenants in our Amended Revolving Facility and related event of default and acceleration of our debt. 50
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