FARMER BROS. CO. This Quarterly Report on Form 10-Q and other documents we file with theSecurities and Exchange Commission ("SEC") contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about us, our future performance, our financial condition, our products, our business strategy, our beliefs and our management's assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls and conference calls. These forward-looking statements can be identified by the use of words like "anticipates," "estimates," "projects," "expects," "plans," "believes," "intends," "will," "could," "may," "assumes" and other words of similar meaning. These statements are based on management's beliefs, assumptions, estimates and observations of future events based on information available to our management at the time the statements are made and include any statements that do not relate to any historical or current fact. These statements are not guarantees of future performance and they involve certain risks, uncertainties and assumptions that are difficult to predict. Actual outcomes and results may differ materially from what is expressed, implied or forecast by our forward-looking statements due in part to the risks, uncertainties and assumptions set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year endedJune 30, 2021 filed with theSEC onSeptember 10, 2021 (the "2021 Form 10-K") and Part II, Item 1A of this Quarterly Report on Form 10-Q, as well as those discussed elsewhere in this report and other factors described from time to time in our filings with theSEC . Factors that could cause actual results to differ materially from those in forward-looking statements include, but are not limited to, the duration and magnitude of the disruption to our business and customers from the COVID-19 pandemic (including the effects of emerging and novel variants of the virus and any virus containment measures such as stay-at-home orders or government mandates) and severe winter weather, levels of consumer confidence in national and local economic business conditions, the duration and magnitude of the pandemic's impact on labor conditions, the success of our strategy to recover from the effects of the pandemic, the success of our turnaround strategy, the execution of our five strategic initiatives, the impact of capital improvement projects, the adequacy and availability of capital resources to fund our existing and planned business operations and our capital expenditure requirements, the relative effectiveness of compensation-based employee incentives in causing improvements in our performance, the capacity to meet the demands of our large national account customers, the extent of execution of plans for the growth of our business and achievement of financial metrics related to those plans, our success in retaining and/or attracting qualified employees, our success in adapting 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, including any effects from inflation, 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 Quarterly Report on Form 10-Q and other factors described from time to time in our filings with theSEC . Given these risks and uncertainties, you should not rely on forward-looking statements as a prediction of actual results. Any or all of the forward-looking statements contained in this Quarterly Report on Form 10-Q and any other public statement made by us, including by our management, may turn out to be incorrect. We are including this cautionary note to make applicable and take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for forward-looking statements. We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise, except as required under federal securities laws and the rules and regulations of theSEC .
Our Business
We are a leading coffee roaster, wholesaler and distributor of coffee, tea and other allied products manufactured 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. Our principal office is located inNorthlake ,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 retailers, 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. 25 -------------------------------------------------------------------------------- Our product categories consist of a robust line of roast and ground coffee, including organic, Direct Trade, Project D.I.R.E.C.T., Fair Trade Certified™ ® and other sustainably-produced offerings; frozen liquid coffee; flavored and unflavored iced and hot teas, including organic andRainforest Alliance Certified™; culinary products including premium spices, pancake and biscuit mixes, gravy and sauce mixes, soup bases, dressings, syrups and sauces, and coffee-related products such as coffee filters, cups, sugar and creamers; and other beverages including cappuccino, cocoa, granitas, and other blender-based beverages 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 ;Portland, Oregon ; andHillsboro, Oregon . We distribute our products from ourNorthlake ,Texas ,Portland, Oregon andHillsboro, Oregon production facilities, as well as separate distribution centers inPortland, Oregon ;Northlake, Illinois ;Moonachie, New Jersey ; andRialto, California . Our products reach our customers primarily through our nationwide DSD network of 238 delivery routes and 90 branch warehouses as ofMarch 31, 2022 , or direct-shipped via common carriers or third-party distributors. DSD sales are primarily 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 through our DSD network, and we rely on 3PL 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 effects of the pandemic and resulting governmental actions have decreased the demand for our products, most notably throughout our DSD network, which consist of small independent restaurants, foodservice operators, large institutional buyers, convenience store chains, hotels, casinos, healthcare facilities, and foodservice distributors. The COVID-19 pandemic continues to have a material impact on our revenues during the three and nine months endedMarch 31, 2022 . As local and state governments across the country have eased COVID-19 restrictions, and vaccines have become generally available, we have continued to see improved average weekly sales trends. During the three months endedMarch 31, 2022 , our average weekly sales were down 16% compared to pre-COVID levels, which represents continued improvement from the three months endedDecember 31, 2021 andMarch 31, 2021 when sales were down 17% and 36%, respectively. Although we experienced improvement in several markets this quarter as COVID further recedes, the recovery is slower in certain regions caused by general COVID-19 restrictions across the country. Although our Direct Ship sales channel was also affected by the COVID-19 pandemic, the impact was significantly less due to the types of customers we serve through this channel. These customers include our retail business and products sold by key grocery stores under their private labels, as well as third party e-commerce platforms, which have been impacted less by the pandemic. For the three months endedMarch 31, 2022 , our Direct Ship revenues have improved which is mainly driven by recently optimized customer base and recovery of several larger accounts. Due to the impact of the COVID-19 pandemic on our revenues, we instituted several initiatives during fiscal 2020 and 2021 to reduce operating expenses and capital expenditures to help mitigate the significant negative impact of our revenue decline. In addition to the costs saving initiatives, in fiscal 2021 we repaid our existing senior secured revolving credit facility, and entered into a new senior secured facility composed of a Revolver Credit Facility Agreement and a Term Credit Facility Agreement (the "Credit Facilities"). We believe that the Credit Facilities provide us with increased flexibility to proactively manage our working capital and execute our long term strategy, maintain compliance with our financial covenants, lower our cost of borrowing, and preserve financial liquidity to mitigate the impact of the uncertain business environment resulting from the COVID-19 pandemic, while continuing to execute on our strategic initiatives. The duration and magnitude of the COVID-19 pandemic, including the extent of the weaker demand for our products, our financial position, results of operations and liquidity, which could be material, remains uncertain. The ultimate impacts of the COVID-19 pandemic on our business will depend on future developments, including the availability and cost of labor, global supply chain disruptions, variants of the virus, and the availability and use of vaccines, which are highly uncertain and cannot be predicted. While we anticipate that our revenue will continue to recover slowly as local, state and national governments ease COVID-19 related restrictions, and vaccines become more widely accepted, there can be no assurance that we will be successful in returning to the pre-COVID-19 pandemic levels of revenue or profitability for our fiscal year endingJune 30, 2022 ("fiscal 2022").
For other impacts of the COVID-19 pandemic, please see "Item 1A. Risk Factors"
in our 2021 Form 10K, which is accessible on the
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Summary Overview of Three Months Ended
During the three months ended
As a result of the COVID-19 pandemic, our largest DSD revenue declines were in our restaurant, healthcare, hotel and casino channels, while the C-store channel was impacted less. However, due to the significant recovery in these channels throughout fiscal 2021 and fiscal 2022, our average weekly DSD sales compared to pre COVID levels improved from down 36% during the three months endedMarch 31, 2021 to down 16% during the three months endedMarch 31, 2022 . Our Direct ship channel sales improved 23.7% during the three months endedMarch 31, 2022 compared to the prior year period. This was due to the recently optimized customer base and recovery from the impact of the COVID-19 pandemic by some of our larger Direct ship customers. Gross margin improved 4.2% from 25.6% during the prior year period to 29.8% during the three months endedMarch 31, 2022 . This improvement was mostly due to the effect of the continued recovery from the COVID-19 pandemic on our DSD channel sales since our DSD channel has higher margins. The increase was also attributable to a decline in our unfavorable production variances and inventory scrap write-downs due to the closure of our agedHouston, Texas plant during fiscal 2021. These improvements were partially offset by higher freight costs due to global supply chain challenges. The price increases and delivery surcharges implemented across our DSD network beginning in the second quarter of fiscal 2022 helped mitigate the impact of higher supply chain and product costs. Operating expenses increased$5.2 million during the three months endedMarch 31, 2022 compared to the prior year period due to a$4.7 million increase in selling expenses and a$0.6 million increase in general and administrative expenses. The increase in selling expenses was primarily due to variable costs, including payroll, associated with the higher sales volumes, as well as operating costs associated with our new distribution center inRialto, California . Our capital expenditures for the three months endedMarch 31, 2022 were$3.0 million , a decrease of$0.1 million compared to the prior year period. This was due to lower investment spending of$1.1 million for several strategic initiatives completed during fiscal 2021, partially offset by higher maintenance capital spend of$0.9 million compared to the prior year period. Our capital expenditures for the nine months endedMarch 31, 2022 were$8.9 million , a decline of$3.9 million compared to the prior year period. This was due to lower investment capital of$6.0 million for several strategic initiatives completed during fiscal 2021, partially offset by higher maintenance capital spend of$2.1 million compared to the prior year period. The higher maintenance capital was mainly due to the purchase of coffee brewing equipment for our DSD customers as volumes have improved, as well as smallNorthlake ,Texas plant and IT projects. Several key initiatives in fiscal 2021, including a focus on refurbished coffee brewing equipment to drive cost savings, helped reduce our purchases as DSD sales volumes return. As ofMarch 31, 2022 , the outstanding principal on our Revolver and Term Loan Credit Facilities was$101.1 million , an increase of$10.1 million fromDecember 31, 2021 . Our cash balance increased by$6.8 million , from$3.6 million as ofDecember 31, 2021 , to$10.4 million as ofMarch 31, 2022 . As ofMarch 31, 2022 , the outstanding principal on our Credit Facilities was$101.1 million , an increase of$10.1 million fromJune 30, 2021 . Our cash balance increased by$0.1 million , from$10.3 million as ofJune 30, 2021 , to$10.4 million as ofMarch 31, 2022 . These changes were primarily due to higher inventory costs, and payment of our fiscal 2021 employee incentive program. These uses of cash were partially offset by cash proceeds from the sale of three branch properties during the nine months endedMarch 31, 2022 and realized hedging gains. 27 --------------------------------------------------------------------------------
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)
2022 2021 Change % Change 2022 2021 Change % Change
Income Statement Data:
Net sales $ 119,398 $ 93,152 $26,246 28.2% $ 346,205 $ 294,993 $51,212 17.4%
Gross margin 29.8 % 25.6 % 4.2% NM 29.5 % 24.6 % 4.9% NM
Operating expenses as a % of sales 33.1 % 36.8 % 3.7% NM 32.4 % 35.4 % 3.0% NM
Loss from operations $ (3,938) $ (10,395) $6,457 62.1% $ (10,290) $ (32,004) $21,714 67.8%
Net loss $ (4,040) $ (13,684) $9,644 70.5% $ (11,884) $ (37,680) $25,796 68.5%
Operating Data:
Coffee pounds 18,797 18,026 771 4.3% 58,466 60,366 (1,900) (3.1)%
EBITDA(1) $ 2,577 $ (4,800) $7,377 153.7% $ 11,055 $ 3,391 $7,664 226.0%
EBITDA Margin(1) 2.2 % (5.2) % 7.4% NM 3.2 % 1.1 % 2.1% NM
Adjusted EBITDA(1) $ 5,021 $ (759) $5,780 761.5% $ 13,009 $ 13,207 $(198) (1.5)%
Adjusted EBITDA Margin(1) 4.2 % (0.8) % 5.0% NM 3.8 % 4.5 % (0.7)% NM
Percentage of Total Net Sales By Product Category
Coffee (Roasted) 64.9 % 65.2 % (0.3)% (0.5)% 64.6 % 66.6 % (2.0)% (3.0)%
Tea & Other Beverages (2) 17.6 % 18.4 % (0.8)% (4.3)% 18.2 % 17.5 % 0.7% 4.0%
Culinary 11.6 % 11.3 % 0.3% 2.7% 11.8 % 11.0 % 0.8% 7.3%
Spices 4.8 % 4.8 % -% -% 4.6 % 4.6 % -% -%
Net sales by product category 98.9 % 99.7 % (0.8)% NM 99.2 % 99.7 % (0.5)% NM
Delivery Surcharge 1.1 % 0.3 % 0.8% NM 0.8 % 0.3 % 0.5% NM
Net sales 100.0 % 100.0 % -% -% 100.0 % 100.0 % -% -%
Other data:
Capital expenditures related to
maintenance $ 2,985 $ 2,042 $ (943) (46.2) % $ 7,893 $ 5,783 $ (2,110) (36.5) %
Total capital expenditures 3,009 3,133 124 4.0 % 8,896 12,769 3,873 30.3 %
Depreciation and amortization
expense 5,791 6,883 1,092 15.9 % 18,119 21,231 3,112 14.7 %
________________
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.
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--------------------------------------------------------------------------------Results of Operations
The following table sets forth information regarding our 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)
2022 2021 Change % Change 2022 2021 Change % Change
Net sales $ 119,398 $ 93,152 $26,246 28.2% $ 346,205 $ 294,993 $51,212 17.4%
Cost of goods sold 83,838 69,274 (14,564) (21.0)% 244,197 222,447 (21,750) (9.8)%
Gross profit 35,560 23,878 11,682 48.9% 102,008 72,546 29,462 40.6%
Selling expenses 27,477 22,767 (4,710) (20.7)% 81,505 71,035 (10,470) (14.7)%
General and administrative expenses 11,595 11,018 (577) (5.2)% 34,796 32,334 (2,462) (7.6)%
Net losses (gains) from sales of assets 426 488 62 NM (4,003) (62) 3,941 NM
Impairment of fixed assets - - - -% - 1,243 1,243 100.0%
Operating expenses 39,498 34,273 (5,225) (15.2)% 112,298 104,550 (7,748) (7.4)%
Loss from operations (3,938) (10,395) 6,457 62.1% (10,290) (32,004) 21,714 67.8%
Other (expense) income:
Interest expense (1,591) (2,993) 1,402 46.8% (7,106) (9,174) 2,068 22.5%
Other, net 1,579 (356) 1,935 NM 5,790 17,283 (11,493) NM
Total other (expense) income (12) (3,349) 3,337 NM (1,316) 8,109 (9,425) NM
Loss before taxes (3,950) (13,744) 9,794 71.3% (11,606) (23,895) 12,289 51.4%
Income tax expense (benefit) 90 (60) (150) NM 278 13,785 13,507 NM
Net loss $ (4,040) $ (13,684) 9,644 70.5% $ (11,884) $ (37,680) 25,796 68.5%
Less: Cumulative preferred dividends,
undeclared and unpaid 149 144 (5) (3.5)% 444 428 (16) (3.7)%
Net loss available to common
stockholders $ (4,189) $ (13,828) 9,639 69.7% $ (12,328) $ (38,108) 25,780 67.6%
___________
NM - Not Meaningful
Three and Nine Months Ended
Net sales in the three months endedMarch 31, 2022 increased$26.2 million , or 28.2%, to$119.4 million from$93.2 million in the three months endedMarch 31, 2021 . Net sales in the nine months endedMarch 31, 2022 increased$51.2 million , or 17.4%, to$346.2 million from$295.0 million in the nine months endedMarch 31, 2021 . The increase in net sales for the three and nine months endedMarch 31, 2022 was due to the continued recovery from the impact of the COVID-19 pandemic on both our DSD and Direct Ship network, along with price increases and delivery surcharges. On our DSD network, the increase was driven by improved volume of green coffee processed and sold, along with improved volume of other beverages, culinary, spice and tea products sold as we continue to experience higher weekly sales volumes compared to prior periods. On the Direct ship network, increase was due to higher volumes on Direct ship customers and price changes to customers utilizing commodity-based pricing arrangements where the changes in the green coffee commodity costs are passed on to the customer. This was also due to the recently optimized customer base and recovery from the impact of the COVID-19 pandemic by some of our larger Direct ship customers. Our Direct ship net sales in the three months endedMarch 31, 2022 included$8.7 million in price increases to customers utilizing commodity-based pricing arrangements. Our direct ship net sales in the three months endedMarch 31, 2021 included no material price increases to customers utilizing commodity-based pricing arrangements.
Our Direct ship net sales in the nine months ended
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The following table presents the effect of changes in unit sales, and unit
pricing and product mix in the three and nine months ended
Three Months Ended Nine Months Ended
March 31, % of Total Mix March 31, % of Total Mix
2022 vs. 2021 Change 2022 vs. 2021 Change
Effect of change in unit sales $ 5.8 22.1 % $ (5.6) (10.9) %
Effect of pricing and product
mix changes 20.4 77.9 % 56.8 110.9 %
Total increase in net sales $ 26.2 100.0 % $ 51.2 100.0 %
Unit sales increased 5.1% and average unit price increased by 21.9% in the three
months ended March 31, 2022 as compared to the same period in the prior fiscal
year, resulting in an increase in our net sales of 28.2%. Unit sales decreased
1.6% and average unit price increased by 19.3% in the nine months ended
March 31, 2022 as compared to the same period in the prior fiscal year,
resulting in an increase in our net sales of 17.4%. Average unit price increased
during three and nine months ended March 31, 2022 due to a higher mix of product
sold via our DSD network versus Direct ship, as Direct ship has a lower average
unit price. There were no new product category introductions which had a
material impact on our net sales in the three and nine months ended March 31,
2022 or 2021.
Gross Profit
Gross profit in the three months ended
Gross profit in the nine months endedMarch 31, 2022 increased$29.5 million , or 40.6%, to$102.0 million from$72.5 million in the nine months endedMarch 31, 2021 . Gross margin increased to 29.5% in the nine months endedMarch 31, 2022 from 24.6% in the nine months endedMarch 31, 2021 . The increase in gross profit in the current year was primarily driven by higher net sales on both the DSD and Direct ship network, partially offset by higher freight costs due to global supply chain challenges. Gross margin improved due to the effect of the continued recovery from COVID-19 on our DSD channel sales since our DSD channel has higher margins. The increase was also attributable to a decline in our unfavorable production variances and inventory scrap write-downs due to the closure of our agedHouston, Texas plant during fiscal 2021. The price increases and delivery surcharges implemented across our DSD network during the second quarter of fiscal 2022 helped mitigate the impact of higher supply chain and product costs.
Operating Expenses
In the three months ended
In the nine months endedMarch 31, 2022 , operating expenses increased$7.7 million to$112.3 million , or 32.4% of net sales, from$104.6 million , or 35.4% of net sales in the prior year period. This increase was due to a$10.5 million increase in selling expenses and a$2.5 million increase in general and administrative expenses, partially offset by a$1.2 million lower fixed assets impairment and$3.9 million increase in net gains from the sales of assets due to the sale of three branch properties during the nine months endedMarch 31, 2022 . The increase in selling expenses during the nine months endedMarch 31, 2022 was primarily due to variable costs, including payroll, associated with the higher sales volumes, as well as operating costs associated with our new distribution center inRialto, California . The increase in general and administrative expenses during the nine months endedMarch 31, 2022 was primarily due to payroll and third party costs related to several supply chain optimization initiatives, partially offset by the absence of one-time severance costs in the prior year period. The increase in payroll in both and selling and general and administrative expenses are predominately due to the expiration of the temporary 15% reduction in base salaries and the expiration of the 401(k) cash match suspension under theFarmer Bros. Co. 401(k) Plan, which were both cost saving actions implemented in fiscal 2020 due to the COVID-19 pandemic.
Total Other (Expense) Income
Total other (expense) income in the three months endedMarch 31, 2022 decreased$3.3 million or 99.6% to$12.0 thousand of expense compared to$3.3 million of expense in the three months endedMarch 31, 2021 . This change was primarily a result of lower interest expense and higher gains on coffee-related derivative instruments in the current year period. Total other (expense) income in the nine months endedMarch 31, 2022 increased$9.4 million or 116.2% to$1.3 million of expense compared to$8.1 million of income in the nine months endedMarch 31, 2021 . This change was 30 -------------------------------------------------------------------------------- primarily a result of the absence of the gains due to the postretirement benefit curtailment in the prior year, partially offset by lower interest expense and higher gains on coffee-related derivative instruments in the current year.
Interest expense in the three months ended
Interest expense in the nine months endedMarch 31, 2022 decreased$2.1 million to$7.1 million from$9.2 million in the prior year period. The decrease in interest expense was principally due to the lower interest rate on our Credit Facilities, and lower losses on our interest rate swap. Other, net in the three months endedMarch 31, 2022 increased by$1.9 million to income of$1.6 million compared to expense of$0.3 million in the prior year period. Other, net in the nine months endedMarch 31, 2022 decreased by$11.5 million to income of$5.8 million compared to income of$17.3 million in the prior year period. The decrease was primarily a result of lower amortized gains on our terminated postretirement medical benefit plan, partially offset by higher mark-to-market net gains on coffee-related derivative instruments not designated as accounting hedges.
Income Taxes
In the three months endedMarch 31, 2022 andMarch 31, 2021 , we recorded income tax expense of$0.1 million and income tax benefit of$0.1 million , respectively. In the nine months endedMarch 31, 2022 andMarch 31, 2021 , we recorded income tax expense of$0.3 million and$13.8 million , respectively. See
Note 16 , Income Taxes, of the Notes to Unaudited Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Non-GAAP Financial Measures
In addition to net loss 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 excluding the impact of:
•income tax expense;
•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 tax expense;
•interest expense;
•depreciation and amortization expense;
•ESOP and share-based compensation expense;
•restructuring and other transition expenses;
•strategic initiatives;
•impairment of fixed assets;
•non-recurring costs associated with the COVID-19 pandemic and 2021 severe winter weather;
•net gains and losses from sales of assets; and
•severance costs.
"Adjusted EBITDA Margin" is defined as Adjusted EBITDA expressed as a percentage of net sales.
For purposes of calculating EBITDA and EBITDA Margin and Adjusted EBITDA and
Adjusted EBITDA Margin, we have not adjusted for the impact of interest expense
on our pension and postretirement benefit plans.
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)
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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 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 loss to EBITDA (unaudited):
Three Months Ended March 31, Nine Months Ended March 31,
(In thousands) 2022 2021 2022 2021
Net loss, as reported $ (4,040) $
(13,684)
90 (60) 278 13,785
Interest expense (1) 736 2,061 4,542 6,055
Depreciation and amortization expense 5,791 6,883 18,119 21,231
EBITDA $ 2,577 $ (4,800) $ 11,055 $ 3,391
EBITDA Margin 2.2 % (5.2) % 3.2 % 1.1 %
____________(1) Excludes interest expense related to pension plans and postretirement benefit plans.
Set forth below is a reconciliation of reported net loss to Adjusted EBITDA
(unaudited):
Three Months Ended March 31, Nine Months Ended March 31,
(In thousands) 2022 2021 2022 2021
Net loss, as reported $ (4,040) $
(13,684)
90 (60) 278 13,785
Interest expense (1) 736 2,061 4,542 6,055
Depreciation and amortization expense 5,791 6,883 18,119 21,231
ESOP and share-based compensation expense 2,018 1,611 5,015 3,561
Strategic initiatives (2) - 1,593 - 3,268
Net losses (gains) from sale of assets 426 488 (4,003) (62)
Severance - 200 942 1,397
Weather-related event - 2021 severe winter
weather - 109 - 109
Non-recurring costs associated with the
COVID-19 pandemic - 40 - 300
Impairment of fixed assets - - - 1,243
Adjusted EBITDA (3) $ 5,021 $ (759) $ 13,009 $ 13,207
Adjusted EBITDA Margin 4.2 % (0.8) % 3.8 % 4.5 %
____________
(1) Excludes interest expense related to pension plans and postretirement
benefit plans.
(2) Includes initiatives related to the Houston facility exit and opening of the
Rialto distribution center.
(3) Adjusted EBITDA for the nine months ended March 31, 2021 includes $14.4
million of higher amortized gains resulting from the curtailment of the
postretirement medical plan in March 2020 , which is further described in our
consolidated financial statements in the 2021 Form 10-K.
Liquidity, Capital Resources and Financial Condition
The following table summarizes our debt obligations:
March 31, 2022 June 30, 2021
Weighted
Average Weighted
Principal Interest Rate Average
(In thousands) Debt Origination Date Maturity Borrowing Amount Carrying Value (1) Carrying Value Interest Rate
Revolver Various 4/25/2025 N/A $ 54,500 2.75 % $ 43,500 6.21 %
Term Loan 4/26/2021 4/25/2025 $47,500 44,694 7.50 % 45,278 7.50 %
Total $ 99,194 $ 88,778
__________(1) The weighted average interest rate excludes the fixed rate on the de-designated Amended Rate Swap
On
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--------------------------------------------------------------------------------Obligations, of the Notes to Consolidated Financial Statements included in this Quarterly Report on Form 10Q.
The revolver under the Credit Facilities has a commitment of up to$80.0 million and a maturity date ofApril 25, 2025 . Availability under the revolver is calculated as the lesser of (a)$80.0 million and (b) the amount derived from pursuant to a borrowing base composed of the sum of (i) 85% of eligible accounts receivable (less a dilution reserve), plus (ii) the lesser of: (a) 80% of eligible raw material inventory, eligible in-transit inventory and eligible finished goods inventory (collectively, "Eligible Inventory"), and (b) 85% of the net orderly liquidation value of Eligible Inventory, minus (c) applicable reserve. The term loan under the Credit Facilities has a principal amount of$47.5 million and a maturity date ofApril 25, 2025 . The Credit Facilities contain customary affirmative and negative covenants and restrictions typical for a financing of this type. Non-compliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the Credit Facilities becoming immediately due and payable and termination of the commitments. As of and throughMarch 31, 2022 , we were in compliance with all of the covenants under the Credit Facilities. Furthermore, the Company believes it will be in compliance with the related financial covenants under these agreements for the next twelve months. The Credit Facilities provide us with increased flexibility to proactively manage our liquidity and working capital, while maintaining compliance with our debt financial covenants, and preserving financial liquidity to mitigate the impact of the uncertain business environment resulting from the COVID-19 pandemic and continue to execute on key strategic initiatives. AtMarch 31, 2022 , the Company had outstanding borrowings on the Revolver Credit Facility of$54.5 million and had utilized$4.1 million of the letters of credit sublimit. Liquidity We generally finance our operations through cash flows from operations and borrowings under our Credit Facilities described above. 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. We believe that the Credit Facilities, to the extent available, in addition to our cash flows from operations, collectively, will be sufficient to fund our working capital and capital expenditure requirements for the next 12 months. We expect to fund our long-term liquidity needs, including contractual obligations, anticipated capital expenditures, principal payments on our Term Loan Credit Facility, as well as working capital requirements, from our operating cash flows and our Credit facilities to the extent available.
At
Impact of the COVID-19 Pandemic on our Liquidity
The COVID-19 pandemic has significantly impacted our financial position, results of operations, cash flows and liquidity as the effects of the pandemic and resulting governmental actions have decreased the demand for our products, most notably throughout our DSD network, which consists of small independent restaurants, foodservice operators, large institutional buyers, and convenience store chains, hotels, casinos, healthcare facilities, and foodservice distributors. The COVID-19 pandemic continues to have material impact on our revenues during the three and nine months endedMarch 31, 2022 . In response to the pandemic's impact on our business, we instituted several initiatives during fiscal 2020 and 2021 to reduce operating expenses and capital expenditures to help mitigate the significant negative impact of our revenue decline. In addition to the costs saving initiatives, in fiscal 2021 we repaid our existing senior secured revolving credit facility, and entered into our new Credit Facilities. We believe that the Credit Facilities provide us with increased flexibility to proactively manage our working capital and execute our long term strategy, maintain compliance with our debt financial covenants, lower our cost of borrowing, and preserve financial liquidity to mitigate the impact of the uncertain business environment resulting from the COVID-19 pandemic, while continuing to execute on our strategic initiatives. The duration and magnitude of the COVID-19 pandemic, including the extent of the weaker demand for our products, our financial position, results of operations and liquidity, which could be material, remains uncertain. The ultimate impacts of the COVID-19 pandemic on our business will depend on future developments, including the availability and cost of labor, global supply chain disruptions, variants of the virus, and the availability and use of vaccines, which is highly uncertain and cannot be predicted. While we anticipate that our revenue will continue to recover as local, state and national governments continue to ease COVID-19 related restrictions, and vaccines become more widely accepted, there can be no assurance that we will be successful in returning to the pre-COVID-19 pandemic levels of revenue or profitability for fiscal 2022. 33
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