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Farmer Brothers Co · 10-Q · For 9/30/13

Filed On 11/7/13, 5:14pm ET   ·   Accession Number 34563-13-52   ·   SEC File 1-34249

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11/07/13  Farmer Brothers Co                10-Q        9/30/13   67:7.5M

Quarterly Report   —   Form 10-Q
Filing Table of Contents

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10-Q   —   Quarterly Report


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  FARM-2013.9.30-10Q  


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                     
Commission file number: 001-34249
FARMER BROS. CO.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
95-0725980
(State of Incorporation)
 
(I.R.S. Employer Identification No.)

20333 South Normandie Avenue, Torrance, California 90502
(Address of Principal Executive Offices; Zip Code)
310-787-5200
Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(b) of the Act:
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  ý    NO  £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  ý    NO  £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one): 
Large accelerated filer
 
£
  
Accelerated filer
 
ý
Non-accelerated filer
 
£  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
£

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES  £    NO  ý
As of November 6, 2013 the registrant had 16,454,212 shares outstanding of its common stock, par value $1.00 per share, which is the registrant’s only class of common stock.



TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 







PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
ASSETS
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,930

 
$
2,678

Restricted cash
6,260

 
8,084

Short-term investments
20,425

 
20,546

Accounts and notes receivable, net
42,840

 
43,922

Inventories
68,682

 
60,867

Income tax receivable
226

 
409

Prepaid expenses
2,748

 
3,243

Total current assets
146,111

 
139,749

Property, plant and equipment, net
90,225

 
92,159

Intangible assets, net
6,061

 
6,277

Other assets
5,402

 
5,484

Deferred income taxes
467

 
467

Total assets
$
248,266

 
$
244,136

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
29,374

 
27,740

Accrued payroll expenses
19,871

 
19,757

Short-term borrowings under revolving credit facility
10,138

 
9,654

Short-term obligations under capital leases
3,430

 
3,409

Short-term derivative liability
9,350

 
9,896

Deferred income taxes
923

 
923

Other current liabilities
6,309

 
5,171

Total current liabilities
79,395

 
76,550

Long-term borrowings under revolving credit facility
10,000

 
10,000

Long-term derivative liability
687

 
1,129

Accrued postretirement benefits
16,267

 
16,076

Other long-term liabilities—capital leases
8,505

 
8,759

Accrued pension liabilities
43,797

 
43,800

Accrued workers’ compensation liabilities
5,082

 
5,132

Deferred income taxes
888

 
852

Total liabilities
$
164,621

 
$
162,298

Commitments and contingencies
 
 

Stockholders’ equity:
 
 
 
Preferred stock, $1.00 par value, 500,000 shares authorized and none issued
$

 
$

Common stock, $1.00 par value, 25,000,000 shares authorized; 16,454,212 and 16,454,422 issued and outstanding at September 30, 2013 and June 30, 2013, respectively
16,454

 
16,454

Additional paid-in capital
35,561

 
34,654

Retained earnings
95,885

 
94,080

Unearned ESOP shares
(20,836
)
 
(20,836
)
Less accumulated other comprehensive loss
(43,419
)
 
(42,514
)
Total stockholders’ equity
$
83,645

 
$
81,838

Total liabilities and stockholders’ equity
$
248,266

 
$
244,136

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




FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
 
 
Three Months Ended September 30,
 
2013
 
2012
 
(Unaudited)
Net sales
$
128,561

 
$
119,153

Cost of goods sold
79,089

 
74,532

Gross profit
49,472

 
44,621

Selling expenses
37,335

 
37,271

General and administrative expenses
9,246

 
8,769

Operating expenses
46,581

 
46,040

Income (loss) from operations
2,891

 
(1,419
)
Other (expense) income:
 
 
 
Dividend income
268

 
259

Interest income
108

 
92

Interest expense
(372
)
 
(457
)
Other, net
(783
)
 
4,945

Total other (expense) income
(779
)
 
4,839

Income before taxes
2,112

 
3,420

Income tax expense
306

 
441

Net income
$
1,806

 
$
2,979

Net income per common share—basic
$
0.11

 
$
0.19

Net income per common share—diluted
$
0.11

 
$
0.19

Weighted average common shares outstanding—basic
15,802,160

 
15,490,365

Weighted average common shares outstanding—diluted
15,860,365

 
15,490,365


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


2



FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
Three Months Ended September 30,
 
2013
 
2012
 
(Unaudited)
Net income
$
1,806

 
$
2,979

Other comprehensive income, net of tax:
 
 
 
Deferred losses on derivatives designated as cash flow hedges
(3,125
)
 

Reclassification of deferred losses on derivatives designated as cash flow hedges to cost of goods sold
2,219

 

Total comprehensive income, net of tax
$
900

 
$
2,979


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




3



FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
 
Three Months Ended September 30,
 
2013
 
2012
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
1,806

 
$
2,979

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
7,424

 
8,340

Provision for (recovery of) doubtful accounts
73

 
(922
)
Deferred income taxes
37

 

Net gains on sales of assets
(123
)
 
(3,213
)
ESOP and share-based compensation expense
904

 
823

Net losses (gains) on derivatives and investments
1,549

 
(802
)
Change in operating assets and liabilities:
 
 
 
Restricted cash
1,824

 
1,483

Short-term investments
(1,429
)
 
52

Accounts and notes receivable
1,009

 
(1,481
)
Inventories
(7,816
)
 
(3,943
)
Income tax receivable
183

 
393

Prepaid expenses and other assets
578

 
120

Accounts payable
1,907

 
2,268

Accrued payroll expenses and other liabilities
(199
)
 
(1,542
)
Accrued postretirement benefits
190

 
288

Other long-term liabilities
(644
)
 
(1,191
)
Net cash provided by operating activities
$
7,273

 
$
3,652

Cash flows from investing activities:
 
 
 
Purchases of property, plant and equipment
(4,757
)
 
(3,572
)
Proceeds from sales of property, plant and equipment
292

 
3,786

Net cash (used in) provided by investing activities
$
(4,465
)
 
$
214

Cash flows from financing activities:
 
 
 
Proceeds from revolving credit facility
9,810

 
4,800

Repayments on revolving credit facility
(9,600
)
 
(9,250
)
Payments of capital lease obligations
(768
)
 
(777
)
Proceeds from stock option exercises
2

 

Net cash used in financing activities
$
(556
)
 
$
(5,227
)
Net increase (decrease) in cash and cash equivalents
$
2,252

 
$
(1,361
)
Cash and cash equivalents at beginning of period
2,678

 
3,906

Cash and cash equivalents at end of period
$
4,930

 
$
2,545


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



4




FARMER BROS. CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies
Organization
Farmer Bros. Co., a Delaware corporation (including its consolidated subsidiaries unless the context otherwise requires, the “Company,” or “Farmer Bros.”), is a manufacturer, wholesaler and distributor of coffee, tea and culinary products. The Company is a direct distributor of coffee to restaurants, hotels, casinos, offices, quick service restaurants ("QSR's"), convenience stores, healthcare facilities and other foodservice providers, as well as private brand retailers in the QSR, grocery, drugstore, restaurant, convenience store and independent coffeehouse channels. The Company was founded in 1912, was incorporated in California in 1923, and reincorporated in Delaware in 2004. The Company operates in one business segment.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States (“GAAP”) for complete consolidated financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals, unless otherwise indicated) considered necessary for a fair presentation of the interim financial data have been included. Operating results for the three months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2014. Events occurring subsequent to September 30, 2013 have been evaluated for potential recognition or disclosure in the unaudited consolidated financial statements for the three months ended September 30, 2013.
The accompanying unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2013, filed with the Securities and Exchange Commission (the “SEC”) on October 9, 2013.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company reviews its estimates on an ongoing basis using currently available information. Changes in facts and circumstances may result in revised estimates and actual results may differ from those estimates.
Derivative Instruments
The Company purchases various derivative instruments as investments or to create economic hedges of its commodity price risk and interest rate risk. These derivative instruments consist primarily of futures and swaps. The Company reports the fair value of derivative instruments on its consolidated balance sheets in "Short-term investments," "Other assets," "Short-term derivative liability," or "Long-term derivative liability." The Company determines the current and noncurrent classification based on the timing of expected future cash flows of individual trades and reports these amounts on a gross basis. Additionally, the Company reports cash held on deposit in margin accounts for coffee-related derivative instruments on a gross basis.
The accounting for the changes in fair value of the Company's derivative instruments can be summarized as follows:  
Derivative Treatment
  
Accounting Method
Normal purchases and normal sales exception
  
Accrual accounting
Designated in a qualifying hedging relationship
  
Hedge accounting
All other derivatives
  
Mark-to-market accounting
The Company enters into green coffee purchase commitments at a fixed price or at a price to be fixed (“PTF”). PTF contracts are purchase commitments whereby the quality, quantity, delivery period, price differential to the coffee "C" market price and other negotiated terms are agreed upon, but the price at which the base “C” market price will be fixed has not yet been established. The coffee "C" market price is fixed at some point after the purchase contract date and before the futures market closes for the delivery month and may be fixed either at the direction of the Company to the vendor, or by the application of a derivative that was separately purchased as a hedge. For both fixed-price and PTF contracts, the Company expects to take

5


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

delivery of and to utilize the coffee in a reasonable period of time and in the conduct of normal business. Accordingly, these purchase commitments qualify as normal purchases and are not recorded at fair value on the Company's consolidated balance sheets.
Prior to April 1, 2013, the Company had no derivative instruments that were designated as accounting hedges. Beginning April 1, 2013, the Company implemented procedures following the guidelines of ASC 815, "Derivatives and Hedging" ("ASC 815"), to enable it to account for certain coffee-related derivatives as accounting hedges in order to minimize the volatility created in the Company's quarterly results from utilizing these derivative contracts and to improve comparability between reporting periods. For a derivative to qualify for designation in a hedging relationship, it must meet specific criteria and the Company must maintain appropriate documentation. The Company establishes hedging relationships pursuant to its risk management policies. The hedging relationships are evaluated at the inception of the hedging relationship and on an ongoing basis to determine whether the hedging relationship is, and is expected to remain, highly effective in achieving offsetting changes in fair value or cash flows attributable to the underlying risk being hedged. The Company also regularly assesses whether the hedged forecasted transaction is probable of occurring. If a derivative ceases to be or is no longer expected to be highly effective, or if the Company believes the likelihood of occurrence of the hedged forecasted transaction is no longer probable, hedge accounting is discontinued prospectively, and future changes in the fair value of the derivative are recognized currently in “Other, net.”
For commodity derivatives designated as cash flow hedges, the effective portion of the change in fair value of the derivative is reported as accumulated other comprehensive income (“AOCI”) and subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. Any ineffective portion of the derivative's change in fair value is recognized currently in “Other, net.” Gains or losses deferred in AOCI associated with terminated derivatives, derivatives that cease to be highly effective hedges, derivatives for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, any gain or loss deferred in AOCI is recognized in “Other, net” at that time. For derivative instruments that are not designated in a hedging relationship, and for which the normal purchases and normal sales exception has not been elected, the changes in fair value are reported in “Other, net.”
The following gains and losses on derivative instruments are netted together and reported in “Other, net” in the Company's consolidated statement of operations:

Gains and losses on all derivatives that are not designated as cash flow hedges and for which the normal purchases and normal sales exception has not been elected; and
The ineffective portion of unrealized gains and losses on derivatives that are designated as cash flow hedges.
The fair value of derivative instruments is based upon broker quotes. At September 30, 2013, approximately 90% of the Company's outstanding coffee-related derivative instruments were designated as cash flow hedges (see Note 2). At September 30, 2012, no derivative instruments were designated as accounting hedges.     
Coffee Brewing Equipment and Service
The Company classifies certain expenses related to coffee brewing equipment provided to customers as cost of goods sold. These costs include the cost of the equipment as well as the cost of servicing that equipment (including service employees’ salaries, cost of transportation and the cost of supplies and parts) and are considered directly attributable to the generation of revenues from its customers. Accordingly, such costs included in cost of goods sold in the accompanying consolidated financial statements for the three months ended September 30, 2013 and 2012 are $6.5 million and $5.8 million, respectively.
The Company has capitalized coffee brewing equipment in the amounts of $3.1 million and $1.9 million in the three months ended September 30, 2013 and 2012, respectively. During the three months ended September 30, 2013 and 2012, the Company had depreciation expense related to the capitalized coffee brewing equipment reported as cost of goods sold in the amounts of $2.9 million and $3.3 million, respectively.
Revenue Recognition
Most product sales are made “off-truck” to the Company’s customers at their places of business by the Company’s sales representatives. Revenue is recognized at the time the Company’s sales representatives physically deliver products to customers and title passes or when it is accepted by the customer when shipped by third-party delivery.
The Company sells roast and ground coffee and tea to The J.M. Smucker Company ("J.M. Smucker") pursuant to a co–packing agreement. The Company recognizes revenue from the co-packing arrangement for the sale of tea on a net basis, net of

6


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

direct costs of revenue, since the Company acts as an agent of J.M. Smucker in such transactions. As of September 30, 2013 and June 30, 2013, the Company had $0.4 million and $0.3 million, respectively, of receivables relating to this arrangement which are included in "Other receivables" (see Note 6).
Earnings (Loss) Per Common Share
Basic earnings (loss) per share (“EPS”) represents net earnings attributable to common stockholders divided by the weighted-average number of common shares outstanding for the period, excluding unallocated shares held by the Company's Employee Stock Ownership Plan ("ESOP"). Diluted EPS represents net earnings attributable to common stockholders divided by the weighted-average number of common shares outstanding, inclusive of the dilutive impact of common equivalent shares outstanding during the period. However, nonvested restricted stock awards (referred to as participating securities) are excluded from the dilutive impact of common equivalent shares outstanding in accordance with authoritative guidance under the two-class method. The nonvested restricted stockholders are entitled to participate in dividends declared on common stock as if the shares were fully vested and hence are deemed to be participating securities. Under the two-class method, earnings (loss) attributable to nonvested restricted stockholders are excluded from net earnings (loss) attributable to common stockholders for purposes of calculating basic and diluted EPS. Computation of EPS for the three months ended September 30, 2013 and 2012 includes the dilutive effect of 58,205 and 0 shares, respectively, issuable under stock options (see Note 12).
Dividends Declared
Although historically the Company has paid a dividend to stockholders, in light of the Company’s current financial position, the Company’s Board of Directors has omitted the payment of a quarterly dividend since the third quarter of fiscal 2011. The amount, if any, of dividends to be paid in the future will depend upon the Company’s then available cash, anticipated cash needs, overall financial condition, loan agreement restrictions, future prospects for earnings and cash flows, as well as other relevant factors.
Impairment of Indefinite-lived Intangible Assets
The Company performs its annual impairment test of goodwill and/or other indefinite-lived intangible assets as of June 30. Goodwill and other indefinite-lived intangible assets are not amortized but instead are reviewed for impairment annually and on an interim basis if events or changes in circumstances between annual tests indicate that an asset might be impaired. Indefinite-lived intangible assets are tested for impairment by comparing their fair values to their carrying values.
In addition to an annual test, indefinite-lived intangible assets must also be tested on an interim basis if events or circumstances indicate that the estimated fair value of such assets has decreased below their carrying value. There were no such events or circumstances during the three months ended September 30, 2013.
Long-Lived Assets, Excluding Indefinite-lived Intangible Assets
The Company reviews the recoverability of its long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Long-lived assets evaluated for impairment are grouped with other assets to the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. The estimated future cash flows are based upon, among other things, assumptions about expected future operating performance, and may differ from actual cash flows. If the sum of the projected undiscounted cash flows (excluding interest) is less than the carrying value of the assets, the assets will be written down to the estimated fair value in the period in which the determination is made. There were no such events or circumstances during the three months ended September 30, 2013.
Recently Adopted Accounting Standards
In February 2013, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2013-02, “Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income” ("ASU 2013-02"), an update to the authoritative guidance related to the reporting of amounts reclassified out of accumulated other comprehensive income. This new requirement about presenting information about amounts reclassified out of accumulated other comprehensive income and their corresponding effect on net income will present, in one place, information about significant amounts reclassified and, in some cases, cross-references to related footnote disclosures. The disclosure amendments in this update are effective prospectively for fiscal years (and interim periods within those years) beginning after December 15, 2012 and early adoption is permitted. The Company adopted ASU 2013-02 beginning July 1, 2013.  Adoption of ASU 2013-02 did not have a material effect on the results of operations, financial position or cash flows of the Company.

7


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

In February 2013, the FASB issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” ("ASU 2013-01"). The amendments limit the scope of ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities” ("ASU 2011-11"), to certain derivative instruments (including bifurcated embedded derivatives), repurchase agreements and reverse repurchase agreements, and securities borrowing and lending arrangements that are either (1) offset on the balance sheet or (2) subject to an enforceable master netting arrangement or similar agreement. The requirements as initially written in ASU 2011-11 would have applied more broadly than intended. The disclosure amendments in this update are effective prospectively for fiscal years (and interim periods within those years) beginning after January 1, 2013. The amendments will be applied retrospectively for all comparative periods presented on the balance sheet. The Company adopted ASU 2013-01 beginning July 1, 2013. Adoption of ASU 2013-01 did not have a material effect on the results of operations, financial position or cash flows of the Company.
In July 2012, the FASB issued ASU No. 2012-02, “Testing Indefinite-Lived Intangible Assets for Impairment” ("ASU 2012-02"), an update to the authoritative guidance related to the impairment testing of indefinite-lived intangible assets. Similar to the guidance for goodwill impairment testing, companies will have the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of the indefinite-lived intangible asset is less than its carrying value. The guidance provides companies with a revised list of examples of events and circumstances to consider, in their totality, to determine whether it is more likely than not that the fair value of the asset is less than its carrying amount. If a company concludes that this is the case, the company is required to perform the quantitative impairment test by comparing the fair value with the carrying value. Otherwise, a company can skip the quantitative test. Companies are not required to perform the qualitative assessment and are permitted to skip the qualitative assessment for any indefinite-lived asset in any period and proceed directly to the quantitative impairment test. The company may resume performing the qualitative assessment in any subsequent period. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted. The Company adopted ASU 2012-02 beginning July 1, 2013. Adoption of ASU 2012-02 did not to have a material effect on the results of operations, financial position or cash flows of the Company.
New Accounting Pronouncements
In July 2013, the FASB issued ASU No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists" ("ASU 2013-11"). An entity is required to present unrecognized tax benefits as a decrease in net operating loss, similar tax loss or tax credit carryforward if certain criteria are met. The determination of whether a deferred tax asset is available is based on the unrecognized tax benefit and the deferred tax asset that exists at the reporting date and presumes disallowance of the tax position at the reporting date. The guidance will eliminate the diversity in practice in the presentation of unrecognized tax benefits but will not alter the way in which entities assess deferred tax assets for realizability. This update is effective for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2013 and will be effective for the Company beginning July 1, 2014. Adoption of ASU 2013-11 is not expected to have a material effect on the results of operations, financial position or cash flows of the Company.

Note 2. Derivative Instruments
Derivative Instruments Held
Coffee-Related Derivative Instruments
The Company is exposed to commodity price risk associated with its PTF green coffee purchase contracts, which are described further in Note 1. The Company utilizes futures contracts and options to manage exposure to the variability in expected future cash flows from forecasted purchases of green coffee attributable to commodity price risk, in some instances, as much as 18 months prior to the actual delivery date. Certain of these coffee-related derivative instruments utilized for risk management purposes have been designated as cash flow hedges, while other coffee-related derivative instruments have not been designated as cash flow hedges or do not qualify for hedge accounting despite hedging the Company's future cash flows on an economic basis.
At September 30, 2013, approximately 90% of the Company's outstanding coffee-related derivative instruments, representing 47.9 million pounds of forecasted green coffee purchases, were designated as cash flow hedges. At September 30, 2012 no coffee-related derivative instruments were designated as accounting hedges.

8


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

For the three months ended September 30, 2013, the Company recorded coffee-related net derivative losses in OCI in the amount of $3.1 million. No coffee-related net derivative gains or losses were recorded in OCI for the three months ended September 30, 2012.
Interest Rate Swap
Effective December 1, 2012, the Company entered into an interest rate swap transaction utilizing a notional amount of $10.0 million and a maturity date of March 1, 2015. The Company entered into the swap transaction to effectively fix the future interest rate during the applicable period on a portion of its borrowings under the revolving credit facility. The swap transaction is intended to manage the Company's interest rate risk related to its revolving credit facility and requires the Company to pay a fixed rate of 0.48% per annum in exchange for a variable interest rate based on 1-month USD LIBOR-BBA. The interest rate swap is not designated as an accounting hedge.
Effect of Derivative Instruments on the Financial Statements
Balance Sheet
Fair values of derivative instruments on the consolidated balance sheets (in thousands):
 
 
Derivatives Designated as
Cash Flow Hedges
 
Derivatives Not Designated as
Accounting Hedges
 
 
September 30,
 
June 30,
 
September 30,
 
 
 
2013
 
2013
 
2013
 
2013
 
 
(Unaudited)
 
 
 
(Unaudited)
 
 
Financial Statement Location:
 
 
 
 
 
 
 
 
Short-term investments:
 
 
 
 
 
 
 
 
Coffee-related derivatives
 
$

 
$

 
$

 
$
4

Short-term derivative liability:
 
 
 
 
 
 
 
 
Coffee futures
 
$
8,718

 
$
9,331

 
$
632

 
$
565

Other current liabilities:
 
 
 
 
 
 
 
 
Interest rate swap
 
$

 
$

 
$
32

 
$
25

Long-term derivative liability:
 
 
 
 
 
 
 
 
Coffee futures
 
$
687

 
$
1,129

 
$

 
$


Statement of Operations
For the three months ended September 30, 2013, the Company recognized $0.5 million in losses on coffee-related derivative instruments designated as cash flow hedges for ineffectiveness and 10% of the total coffee-related derivative instruments were excluded from the effectiveness assessment since they were not designated as cash flow hedges. Cash flow hedge contracts outstanding as of September 30, 2013 will expire within 26 months.
The following table presents pretax net gains and losses for the Company's coffee-related derivative instruments designated as cash flow hedges, as recognized in "Cost of goods sold," "Accumulated other comprehensive income" ("AOCI") and "Other, net" (in thousands):
(Unaudited)
 
Three Months Ended September 30,
 
 
2013
 
2012
 
Financial Statement Classification
Net losses recognized in earnings (effective portion)
 
$
(2,219
)
 
$

 
Cost of goods sold
Net losses recognized in other comprehensive income (loss) (effective portion)
 
$
(3,125
)
 
$

 
AOCI
Net losses recognized in earnings (ineffective portion)
 
$
(507
)
 
$

 
Other, net


9


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

For the three months ended September 30, 2013, there were no gains or losses recognized in income as a result of excluding amounts from the assessment of hedge effectiveness or as a result of reclassifications to earnings following the discontinuance of any cash flow hedges.
Gains and losses on derivatives not designated as accounting hedges are included in "Other, net" in the Company's consolidated statements of operations and in "Net losses (gains) on derivatives and investments" in the Company's consolidated statements of cash flow.
Net gains and losses recorded in "Other, net" are as follows:
(In thousands)
 
Three Months Ended September 30,
 
 
2013
 
2012
 
 
(Unaudited)
Net (losses) gains from coffee-related derivatives
 
$
(848
)
 
$
703

Net (losses) gains from investments
 
(694
)
 
99

Net losses from interest rate swap
 
(7
)
 

Net (losses) gains on derivatives and investments
 
(1,549
)
 
802

Net gains from sales of assets
 
123

 
3,213

Other gains, net
 
643

 
930

Other, net
 
$
(783
)
 
$
4,945

Offsetting of Derivative Assets and Liabilities
The Company has agreements in place that allow for the financial right of offset for derivative assets and liabilities at settlement or in the event of default under the agreements. Additionally, the Company maintains accounts with its brokers to facilitate financial derivative transactions in support of its risk management activities. Based on the value of the Company’s positions in these accounts and the associated margin requirements, the Company may be required to deposit cash into these broker accounts.

10


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

The following tables present the Company’s net exposure from its offsetting derivative asset and liability positions, as well as cash margins on deposit with each of its counterparties as of the reporting dates indicated:
Counterparty A
 
 
 
Gross Amount Reported on Balance Sheet
 
Netting Adjustments
 
Cash Collateral Posted (Received)
 
Net Exposure
At September 30, 2013 (Unaudited)
 
Derivative Assets
 
$

 
$

 
$

 
$

 
 
Derivative Liabilities
 
$
10,037

 
$

 
$
6,260

 
$
3,777

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets
 
$
4

 
$
(4
)
 
$

 
$

 
 
Derivative Liabilities
 
$
11,025

 
$
(4
)
 
$
8,084

 
$
2,937

Counterparty B
 
 
 
Gross Amount Reported on Balance Sheet
 
Netting Adjustments
 
Cash Collateral Posted (Received)
 
Net Exposure
At September 30, 2013 (Unaudited)
 
Derivative Assets
 
$

 
$

 
$

 
$

 
 
Derivative Liabilities
 
$
32

 
$

 
$

 
$
32

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative Assets
 
$

 
$

 
$

 
$

 
 
Derivative Liabilities
 
$
25

 
$

 
$

 
$
25

Credit-Risk-Related Features
The Company does not have any credit-risk-related contingent features that would require it, in certain circumstances, to post additional collateral in support of its net derivative liability positions. The Company had $6.3 million and $8.1 million, respectively, in restricted cash representing cash held on deposit in margin accounts for coffee-related derivative instruments at September 30, 2013 and June 30, 2013 (see Note 5). Changes in commodity prices and the number of coffee-related derivative instruments held could have a significant impact on cash deposit requirements under the Company's broker and counterparty agreements.
Cash Flow Hedges
Changes in the fair value of the Company's coffee-related derivative instruments designated as cash flow hedges, to the extent effective, are deferred in AOCI and reclassified into earnings in the same period or periods in which the hedged forecasted purchases affect earnings, or when it is probable that the hedged forecasted transaction will not occur by the end of the originally specified time period. Based on recorded values at September 30, 2013, $8.2 million of net losses are expected to be reclassified into earnings within the next twelve months. These recorded values are based on market prices of the commodities as of September 30, 2013. Due to the volatile nature of commodity prices, actual gains or losses realized within the next twelve months will likely differ from these values. These gains or losses are expected to substantially offset net losses or gains that will be realized in earnings from previous unfavorable or favorable market movements associated with underlying hedged transactions.
Note 3. Investments
Preferred stock investments as of September 30, 2013 consisted of securities with a fair value of $10.7 million in an unrealized loss position and securities with a fair value of $9.7 million in an unrealized gain position. Preferred stock investments as of June 30, 2013 consisted of securities with a fair value of $7.3 million in an unrealized loss position and $13.2 million in an unrealized gain position.

11


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

The following tables show gross unrealized losses (although such losses have been recognized in the consolidated statements of operations) and fair value for those investments that were in an unrealized loss position as of September 30, 2013 and June 30, 2013, aggregated by the length of time those investments have been in a continuous loss position: 
 
 
September 30, 2013 (Unaudited)
 
 
Less than 12 Months
 
Total
(In thousands)
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Preferred stock
 
$
5,861

 
$
(342
)
 
$
10,706

 
$
(524
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 Months
 
Total
(In thousands)
 
Fair Value
 
Unrealized Loss
 
Fair Value
 
Unrealized Loss
Preferred stock
 
$
5,391

 
$
(161
)
 
$
7,318

 
$
(228
)

Note 4. Fair Value Measurements
The Company groups its assets and liabilities at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. These levels are:
Level 1—Valuation is based upon quoted prices for identical instruments traded in active markets.
Level 2—Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3—Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

12


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

Assets and liabilities measured and recorded at fair value on a recurring basis were as follows (in thousands): 
September 30, 2013 (Unaudited)
 
Total
 
Level 1
 
Level 2
 
Level 3
Preferred stock(1)
 
$
20,425

 
$
15,744

 
$
4,681

 
$

Futures, options and other derivative assets
 
$

 
$

 
$

 
$

Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative liabilities
 
$
9,405

 
$
9,405

 
$

 
$

Derivatives not designated as accounting hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative liabilities
 
$
632

 
$
632

 
$

 
$

Derivative liabilities — interest rate swap
 
$
32

 
$

 
$
32

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
 
Level 1
 
Level 2
 
Level 3
Preferred stock(1)
 
$
20,542

 
$
15,738

 
$
4,804

 
$

Futures, options and other derivative assets(1)
 
$
4

 
$

 
$
4

 
$

Derivatives designated as cash flow hedges:
 

 
 
 
 
 
 
Coffee-related derivative liabilities
 
$
10,460

 
$
10,460

 
$

 
$

Derivatives not designated as accounting hedges:
 
 
 
 
 
 
 
 
Coffee-related derivative liabilities
 
$
565

 
$
565

 
$

 
$

Derivative liabilities — interest rate swap
 
$
25

 
$

 
$
25

 
$

 
 
 
 
 
 
 
 
 
____________________ 
(1)
Included in "Short-term investments" on the consolidated balance sheets.
There were no significant transfers of securities between Level 1 and Level 2. 
Effective December 1, 2012, the Company entered into an interest rate swap transaction utilizing a notional amount of $10.0 million and a maturity date of March 1, 2015. The Company entered into the swap transaction to effectively fix the future interest rate during the applicable period on a portion of its borrowings under the revolving credit facility. The swap transaction is intended to manage the Company's interest rate risk related to its revolving credit facility and requires the Company to pay a fixed rate of 0.48% per annum in exchange for a variable interest rate based on 1-month USD LIBOR-BBA.
The Company values its interest rate swap using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of the interest rate swap. This analysis reflects the contractual terms of the interest rate swap, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.
Valuation of the interest rate swap transaction is based on proprietary curves that take into account both Level 1 and Level 2 inputs. The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves). These forward curves are market-based, utilizing observable market data. Discount curves for present value purposes are constructed using rates representing estimated costs of funding swap positions for early terminations based on an appropriate observable discount rate.

Note 5. Restricted Cash
The Company had $6.3 million and $8.1 million, respectively, in restricted cash representing cash held on deposit in margin accounts for coffee-related derivative instruments at September 30, 2013 and June 30, 2013. Changes in commodity prices and the number of coffee-related derivative instruments held could have a significant impact on cash deposit requirements under the Company's broker and counterparty agreements.

13


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

Note 6. Accounts and Notes Receivable, Net
 
 
 
(In thousands)
 
(Unaudited)
 
 
Trade receivables
 
43,142

 
$
43,965

Other receivables
 
886

 
1,072

Allowance for doubtful accounts
 
(1,188
)
 
(1,115
)
 
 
$
42,840

 
$
43,922


Note 7. Inventories
 
 
Processed
 
Unprocessed
 
Total
September 30, 2013 (Unaudited)
 
(In thousands)
Coffee
 
$
15,580

 
$
13,292

 
$
28,872

Tea and culinary products
 
24,921

 
4,470

 
29,391

Coffee brewing equipment
 
5,672

 
4,747

 
10,419

 
 
$
46,173

 
$
22,509

 
$
68,682

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Processed
 
Unprocessed
 
Total
 
(In thousands)
Coffee
 
$
12,553

 
$
12,796

 
$
25,349

Tea and culinary products
 
21,406

 
4,194

 
25,600

Coffee brewing equipment
 
5,144

 
4,774

 
9,918

 
 
$
39,103

 
$
21,764

 
$
60,867

Inventories are valued at the lower of cost or market. The Company accounts for coffee, tea and culinary products on the last in, first out ("LIFO") basis and coffee brewing equipment manufactured on the first in, first out ("FIFO") basis. The Company regularly evaluates these inventories to determine whether market conditions are correctly reflected in the recorded carrying value. At the end of each quarter, the Company records the expected beneficial effect of the liquidation of LIFO inventory quantities, if any, and records the actual impact at fiscal year-end. An actual valuation of inventory under the LIFO method is made only at the end of each fiscal year based on the inventory levels and costs at that time. If inventory quantities decline at the end of the fiscal year compared to the beginning of the fiscal year, the reduction results in the liquidation of LIFO inventory quantities carried at the cost prevailing in prior years. This LIFO inventory liquidation may result in a decrease or increase in cost of goods sold depending on whether the cost prevailing in prior years was lower or higher, respectively, than the current year cost. Accordingly, interim LIFO calculations must necessarily be based on management's estimates of expected fiscal year-end inventory levels and costs. Because these estimates are subject to many forces beyond management's control, interim results are subject to the final fiscal year-end LIFO inventory valuation. The Company anticipates its inventory levels at June 30, 2014 will be same as of June 30, 2013 and, therefore, did not record an adjustment to cost of goods sold for the three months ended September 30, 2013. No adjustment to cost of goods sold was recorded for the three months ended September 30, 2012.
In the three months ended September 30, 2013 the Company recorded a reduction to inventory reserve for slow-moving and obsolete inventory in the amount of $0.2 million compared to an increase in inventory reserve for slow-moving and obsolete inventory in the amount of $0.3 million in the three months ended September 30, 2012.

Note 8. Employee Benefit Plans
The Company provides pension plans for most full time employees. Generally the plans provide benefits based on years of service and/or a combination of years of service and earnings. The Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees and provides retiree medical coverage and, depending on the age of the retiree, dental and vision coverage. The Company also provides a postretirement death benefit to certain of its employees and retirees.

14


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

The Company is required to recognize the funded status of a benefit plan in its consolidated balance sheet. The Company is also required to recognize in OCI certain gains and losses that arise during the period but are deferred under pension accounting rules.
Single Employer Pension Plans
The Company has a defined benefit pension plan, the Farmer Bros. Salaried Employees Pension Plan (the “Farmer Bros. Plan”), for the majority of its employees who are not covered under a collective bargaining agreement. The Company amended the Farmer Bros. Plan, freezing the benefit for all participants effective June 30, 2011. After the plan freeze, participants do not accrue any benefits under the plan, and new hires are not eligible to participate in the plan.
The Company also has two defined benefit pension plans for certain hourly employees covered under collective bargaining agreements (the “Brewmatic Plan” and the “Hourly Employees' Plan”). In the fourth quarter of fiscal 2013, the Company determined that it would shut down its equipment refurbishment operations in Los Angeles, California and move them to its Oklahoma City distribution center effective August 30, 2013. Due to this shut down, all hourly employees responsible for these operations in Los Angeles were terminated and their pension benefits in the Brewmatic Plan were frozen effective August 30, 2013. As a result, the Company recorded a pension curtailment expense of $34,000 in the fourth quarter of fiscal 2013.
The net periodic benefit cost for the defined benefit pension plans is as follows:
 
Three Months Ended
September 30,
 
2013
 
2012
(In thousands)
(Unaudited)
Service cost
$
100

 
$
119

Interest cost
1,452

 
1,449

Expected return on plan assets
(1,705
)
 
(1,660
)
Amortization of net (gain) loss*
336

 
387

Amortization of prior service cost (credit)*

 
5

Net periodic benefit cost
$
183

 
$
300

_____________
*
These amounts represent the estimated portion of the net (gain) loss and net prior service cost (credit) remaining in AOCI that is expected to be recognized as a component of net periodic benefit cost over the current fiscal year.
 
Weighted-average assumptions used to determine net periodic benefit cost
 
Fiscal
 
2014
 
2013
Discount rate
4.50%
 
4.55%
Expected long-term rate of return on plan assets
8.00%
 
8.00%
Rate of compensation increase
N/A
 
N/A
 
Basis used to determine expected long-term return on plan assets
Historical and future projected returns of multiple asset classes were analyzed to develop a risk-free real rate of return and risk premiums for each asset class. The overall rate for each asset class was developed by combining a long-term inflation component, the risk-free real rate of return, and the associated risk premium. A weighted-average rate of return was developed based on those overall rates and the target asset allocation of the plans.
Multiemployer Pension Plans
The Company participates in a multiemployer defined benefit pension plan, the Western Conference of Teamsters Pension Plan (“WCTPP”), that is union sponsored and collectively bargained for the benefit of certain employees subject to collective bargaining agreements. The Company makes contributions to WCTPP generally based on the number of hours worked by the participants in accordance with the provisions of negotiated labor contracts.

15


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

The risks of participating in multiemployer pension plans are different from single-employer plans in that: (i) assets contributed to a multiemployer plan by one employer may be used to provide benefits to employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers; and (iii) if the Company stops participating in the multiemployer plan, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as a withdrawal liability.

Effective October 2011, the Company withdrew from the defined benefit pension plan, United Teamsters Pension Fund, and replaced it with the defined contribution pension plan, “United Teamsters Annuity Fund” (“Annuity Fund”), for its employees covered by a certain collective bargaining agreement with a term expiring in 2014. The Company incurred no withdrawal liability related to the withdrawal from the United Teamsters Pension Fund. The Company's contributions to the Annuity Fund are based on the number of compensable hours worked by the Company's employees who participate in the Annuity Fund.
In fiscal 2012, the Company withdrew from the Labor Management Pension Fund and recorded a charge of $4.3 million associated with withdrawal from this plan, representing the present value of the estimated withdrawal liability expected to be paid in quarterly installments of $0.1 million over 80 quarters. Installment payments will commence once the final determination of the amount of withdrawal liability is established, which determination may take up to 24 months from the date of withdrawal from the pension plan. Upon withdrawal, the employees covered under this multiemployer pension plan were included in the Company's 401(k) plan (the “401(k) Plan”).
Future collective bargaining negotiations may result in the Company withdrawing from the remaining multiemployer pension plans in which it participates and, if successful, the Company may incur a withdrawal liability, the amount of which could be material to the Company's results of operations and cash flows.
Multiemployer Plans Other Than Pension Plans
The Company participates in eight defined contribution multiemployer plans other than pension plans that provide medical, vision, dental and disability benefits for active, union-represented employees subject to collective bargaining agreements. The plans are subject to the provisions of the Employee Retirement Income Security Act of 1974, and provide that participating employers make monthly contributions to the plans in an amount as specified in the collective bargaining agreements. Also, the plans provide that participants make self-payments to the plans, the amounts of which are negotiated through the collective bargaining process. The Company's participation in these plans is governed by the collective bargaining agreements which expire on or before June 30, 2017.
401(k) Plan
The Company's 401(k) Plan is available to all eligible employees who have worked more than 1,000 hours during a calendar year and were employed at the end of the calendar year. Participants in the 401(k) Plan may choose to contribute a percentage of their annual pay subject to the maximum contribution allowed by the Internal Revenue Service. The Company's matching contribution is discretionary based on approval by the Company's Board of Directors. For the calendar years 2011, 2012 and 2013, the Company's Board of Directors approved a Company matching contribution of 50% of an employee's annual contribution to the 401(k) Plan, up to 6% of the employee's eligible income. The matching contributions (and any earnings thereon) vest at the rate of 20% for each of the participant's first 5 years of vesting service, so that a participant is fully vested in his or her matching contribution account after 5 years of vesting service. A participant is automatically vested in the event of death, disability or attainment of age 65 while employed by the Company. Employees are 100% vested in their contributions. For employees subject to a collective bargaining agreement, the match is only available if so provided in the labor agreement.
The Company recorded matching contributions of $0.4 million and $0.5 million in operating expenses for the three months ended September 30, 2013 and 2012, respectively.

16


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

Postretirement Benefits
The Company sponsors a postretirement defined benefit plan that covers qualified non-union retirees and certain qualified union retirees. The plan provides medical, dental and vision coverage for retirees under age 65 and medical coverage only for retirees age 65 and above. Under this postretirement plan, the Company’s contributions toward premiums for retiree medical, dental and vision coverage for participants and dependents are scaled based on length of service, with greater Company contributions for retirees with greater length of service, but subject to a maximum monthly Company contribution.
The Company also provides a postretirement death benefit to certain of its employees and retirees, subject, in the case of current employees, to continued employment with the Company until retirement, and certain other conditions related to the manner of employment termination and manner of death. The Company records the actuarially determined liability for the present value of the postretirement death benefit. The Company has purchased life insurance policies to fund the postretirement death benefit wherein the Company owns the policy but the postretirement death benefit is paid to the employee's or retiree's beneficiary. The Company records an asset for the fair value of the life insurance policies which equates to the cash surrender value of the policies. 
The following table shows the components of total net periodic postretirement benefit cost for the three months ended September 30, 2013 and 2012 for the postretirement medical and death benefits. Net periodic postretirement benefit cost for the three months ended September 30, 2013 was based on employee census information as of July 1, 2013 and asset information as of June 30, 2013.
 
 
 
Three Months Ended September 30,
 
 
2013
 
2012
 
 
(Unaudited)
Components of Net Periodic Postretirement Benefit Cost:
 
 
 
 
Service cost
 
$
493

 
$
493

Interest cost
 
242

 
242

Expected return on plan assets
 

 

Amortization of net gain
 
4

 
4

Amortization of unrecognized transition (asset) obligation
 

 

Amortization of prior service cost (credit)
 
(439
)
 
(439
)
Net periodic postretirement benefit cost
 
$
300

 
$
300

Weighted-average assumptions used to determine net periodic postretirement benefit cost 
 
Fiscal
 
2014
 
2013
Postretirement medical benefit discount rate
4.20%
 
4.20%
Postretirement death benefit discount rate
4.39%
 
4.39%

Note 9. Bank Loan
On September 12, 2011, the Company entered into an Amended and Restated Loan and Security Agreement (the “Loan Agreement”) among the Company and Coffee Bean International, Inc. (“CBI”), as Borrowers, certain of the Company’s other subsidiaries, as Guarantors, the Lenders party thereto, and Wells Fargo Bank, National Association (“Wells Fargo”), as Agent.
On January 9, 2012, the Loan Agreement was amended in connection with JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), becoming an additional Lender thereunder. On March 18, 2013, the Loan Agreement was amended further ("Amendment No. 2") to amend the definition of "Maximum Credit" available thereunder to $75.0 million from $85.0 million. Pursuant to Amendment No. 2, Wells Fargo will provide a commitment of $53.0 million and JPMorgan Chase will provide a commitment of $22.0 million.
The Loan Agreement provides for a senior secured revolving credit facility of up to $75.0 million, with a letter of credit sublimit of $20.0 million. The revolving credit facility provides for advances of 85% of eligible accounts receivable and 75% of eligible inventory (subject to a $60.0 million inventory loan limit), as defined. The Loan Agreement provides for interest rates

17


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

based on modified Monthly Average Excess Availability levels with a range of PRIME + 0.25% to PRIME + 0.75% or Adjusted Eurodollar Rate + 2.0% to Adjusted Eurodollar Rate + 2.5%. The Loan Agreement has an amendment fee of 0.375% and an unused line fee of 0.25%. Outstanding obligations under the Loan Agreement are collateralized by all of the Borrowers’ assets, including the Company’s preferred stock portfolio. The Loan Agreement expires on March 2, 2015.
The Loan Agreement contains a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including those relating to reporting requirements, maintenance of records, properties and corporate existence, compliance with laws, incurrence of other indebtedness and liens, limitations on certain payments, including the payment of dividends and capital expenditures, and transactions and extraordinary corporate events. The Loan Agreement allows the Company to pay dividends, provided, among other things, certain liquidity requirements are met, the aggregate amount of all such payments in any fiscal year shall not exceed $7.0 million ($1.75 million in any fiscal quarter), and no event of default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The Loan Agreement also contains financial covenants requiring the Borrowers to maintain minimum Excess Availability and Total Liquidity levels. The Loan Agreement allows the Lenders to establish reserve requirements, which may reduce the amount of credit otherwise available to the Company, to reflect events, conditions, or risks that would have a reasonable likelihood of adversely affecting the Lender’s collateral or the Company’s assets, including the Company’s green coffee inventory.
Effective December 1, 2012, the Company entered into an interest rate swap transaction utilizing a notional amount of $10.0 million and a maturity date of March 1, 2015. The Company entered into the swap transaction to effectively fix the future interest rate during the applicable period on a portion of its borrowings under the revolving credit facility. The swap transaction is intended to manage the Company's interest rate risk related to its revolving credit facility and requires the Company to pay a fixed rate of 0.48% per annum in exchange for a variable interest rate based on 1-month USD LIBOR-BBA. As of September 30, 2013, the variable interest rate based on 1-month USD LIBOR-BBA was 0.18%.
The Company has not designated its interest rate swap as an accounting hedge. The Company records the interest rate swap on its consolidated balance sheet at fair value with the changes in fair value recorded as gain or loss in "Other, net" in its consolidated statements of operations. In the three months ended September 30, 2013, the Company recorded a loss of $7,000 for the change in fair value of its interest rate swap. No such gain or loss was recorded in fiscal 2012 (see Note 2).
On September 30, 2013, the Company was eligible to borrow up to a total of $64.9 million under the credit facility. As of September 30, 2013, the Company had outstanding borrowings of $20.2 million, including loan extension fees of $0.1 million, utilized $11.2 million of the letters of credit sublimit, and had excess availability under the credit facility of $33.5 million. In connection with entering into the interest rate swap agreement on December 1, 2012, the Company reclassified $10.0 million of its borrowings under the revolving credit facility as long-term because the Company intends to repay the borrowings in accordance with the termination date of the swap agreement which extends beyond one year. At September 30, 2013, the weighted average interest rate on the Company's outstanding borrowings under the credit facility was 1.61%.
As of September 30, 2013, the Company was in compliance with all restrictive covenants under the credit facility. On October 3, 2013, the Company and Wells Fargo, as Agent, and the Lenders entered into a Letter Agreement regarding Waiver of Event of Default (the “Waiver Agreement”) pursuant to which Wells Fargo agreed to waive the event of default arising under the Loan Agreement as a result of the Company’s failure to furnish, in a timely manner, its audited consolidated financial statements and unaudited consolidating financial statements, and the accompanying notes thereto, together with the unqualified opinion of independent certified public accountants with respect to the audited consolidated financial statements, for the fiscal year ended June 30, 2013; provided that the Company furnish to Agent such financial information by October 15, 2013. The Company furnished the required financial information on October 9, 2013. There can be no assurance that the Lenders will issue a waiver or grant an amendment to the covenants in future periods, if the Company required one.

Note 10. Share-based Compensation
On August 23, 2007, the Company’s Board of Directors approved the Farmer Bros. Co. 2007 Omnibus Plan (the “Omnibus Plan”), which was approved by stockholders on December 6, 2007. On December 6, 2012, the stockholders approved an amendment to increase the maximum number of shares of common stock available for issuance under the Omnibus Plan to 1,125,000 from 1,000,000, subject to adjustment as provided in the Omnibus Plan. Prior to adoption of the Omnibus Plan the Company had no share-based compensation plan. Awards issued under the Omnibus Plan may take the form of stock options, stock appreciation rights, restricted stock, restricted stock units, dividend equivalents, performance-based awards, stock payments, cash-based awards or other incentives payable in cash or shares of stock, or any combination thereof.

18


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

Each award will be set forth in a separate agreement with the person receiving the award and will indicate the type, terms and conditions of the award. The Company has placed a proposal on the ballot for its upcoming Annual Meeting of Stockholders requesting stockholder approval of the Farmer Bros. Co. Amended and Restated 2007 Long-Term Incentive Plan (the "Amended Equity Plan"), which is an amendment and restatement of, and successor to, the Omnibus Plan. If approved by stockholders, the Amended Equity Plan would implement certain material changes to the Omnibus Plan, including, without limitation, an increase in the number of shares of common stock authorized for issuance of awards by 250,000 from 1,125,000 to 1,375,000.
The Company measures and recognizes compensation expense for all share-based payment awards made under the Omnibus Plan based on estimated fair values. No stock options were granted during the three months ended September 30, 2013 or 2012.
Stock Options
The Company estimates the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service period in the Company’s consolidated statements of operations.
Share-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period. Compensation expense recognized for all stock option awards granted is recognized using the straight-line method over the vesting period. The options generally vest ratably over a period of 3 years, however, fiscal 2012 grants included nonqualified stock option awards to executive officers with different vesting periods, in each case, subject to certain events of acceleration as provided in the applicable employment agreement or award agreement with the executive officer.
The share-based compensation expense recognized in the Company’s consolidated statements of operations for the three months ended September 30, 2013 and 2012 is based on awards ultimately expected to vest. Currently, management estimates an annual forfeiture rate of 6.5% based on actual forfeiture experience from the inception of the Omnibus Plan. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
The Company uses the Black-Scholes option valuation model, which requires management to make certain assumptions for estimating the fair value of stock options at the date of the grant. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimates, in management’s opinion the existing models may not necessarily provide a reliable single measure of the fair value of the Company’s stock options. Although the fair value of stock options is determined using an option valuation model that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.
The Company’s assumption regarding expected stock price volatility is based on the historical volatility of the Company’s stock price. The risk-free interest rate is based on U.S. Treasury zero-coupon issues at the date of grant with a remaining term equal to the expected life of the stock options. The average expected life is based on the midpoint between the vesting date and the end of the contractual term of the award.
 

19


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

The following table summarizes stock option activity for the three months ended September 30, 2013 (unaudited):
Outstanding Stock Options:
 
Number
of
Stock
Options
 
Weighted
Average
Exercise
Price ($)
 
Weighted
Average
Grant Date
Fair Value ($)
 
Weighted
Average
Remaining
Life
(Years)
 
Aggregate
Intrinsic
Value
(Dollars in thousands)
Outstanding at June 30, 2013
 
557,427

 
12.81
 
5.44
 
5.1
 
1,620

Granted
 

 
 
 
 

Exercised
 
(346
)
 
7.42
 
3.64
 
 
3

Cancelled/Forfeited
 
(11,681
)
 
19.00
 
6.65
 
 

Outstanding at September 30, 2013
 
545,400

 
12.68
 
5.41
 
5.0
 
1,996

Vested and exercisable, September 30, 2013
 
231,663

 
15.22
 
5.81
 
3.8
 
604

Vested and expected to vest, September 30, 2013
 
522,652

 
12.76
 
5.42
 
3.8
 
1,899

 
The aggregate intrinsic values in the table above represent the total pretax intrinsic value, based on the Company’s closing stock price of $15.06 at September 30, 2013, representing the last trading day of the fiscal quarter ended September 30, 2013, which would have been received by award holders had all award holders exercised their awards that were in-the-money as of that date. Total fair value of options vested during the three months ended September 30, 2013 was $0.
As of September 30, 2013 and 2012, there was approximately $1.2 million and $1.1 million, respectively, of unrecognized compensation cost related to stock options. Compensation expense recognized in general and administrative expenses in each of the three months ended September 30, 2013 and 2012 was $0.2 million.
Restricted Stock
No shares of of restricted stock were awarded during the three months ended September 30, 2013. During the three months ended September 30, 2012, the Company granted a total of 6,830 shares of restricted stock with a weighted average grant date fair value of $9.06. Shares of restricted stock generally vest at the end of three years for eligible employees and officers who are employees. The fiscal 2012 grants included awards to executive officers with different vesting periods, in each case, subject to accelerated vesting as provided in the applicable employment agreement or award agreement with the executive officer. Shares of restricted stock generally vest ratably over a period of three years for directors.
Compensation expense is recognized on a straight-line basis over the service period based on the estimated fair value of the restricted stock. Compensation expense recognized in general and administrative expenses for the three months ended September 30, 2013 and 2012 was $0.1 million and $0.2 million, respectively. As of September 30, 2013 and 2012, there was approximately $0.8 million and $1.1 million, respectively, of unrecognized compensation cost related to restricted stock.
The following table summarizes restricted stock activity for the three months ended September 30, 2013 (unaudited):
Outstanding and Nonvested Restricted Stock Awards:
 
Shares
Awarded
 
Weighted
Average
Grant Date
Fair Value
($)
 
Weighted
Average
Remaining
Life
(Years)
 
Aggregate
Intrinsic
Value
($ in thousands)
Outstanding at June 30, 2013
 
139,360

 
9.87

 
1.9
 
1,959

Granted
 

 

 
 

Exercised/Released
 

 

 
 

Cancelled/Forfeited
 
(556
)
 
8.84

 
 

Outstanding at September 30, 2013
 
138,804

 
9.87

 
1.7
 
2,090

Expected to vest, September 30, 2013
 
116,645

 
9.85

 
1.7
 
1,757


Note 11. Income Taxes
The Company adjusts its effective tax rate each quarter based on its current estimated annual effective tax rate. The Company also records the tax impact of certain discrete items, unusual or infrequently occurring tax events and the effects of

20


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

changes in tax laws or rates, in the interim period in which they occur. In addition, the Company evaluates its deferred tax assets quarterly to determine if a valuation allowance is required.
The Company considered whether a valuation allowance should be recorded against deferred tax assets based on the likelihood that the benefits of the deferred tax assets would or would not ultimately be realized in future periods. In making this assessment, significant weight was given to evidence that could be objectively verified such as recent operating results and less consideration was given to less objective indicators such as future earnings projections.
After consideration of positive and negative evidence, including the recent history of losses, the Company cannot conclude that it is more likely than not that it will generate future earnings sufficient to realize the Company's deferred tax assets as of September 30, 2013. Accordingly, the Company decreased its valuation allowance by $0.7 million in the three months ended September 30, 2013 to $81.8 million. The valuation allowance at June 30, 2013 was $82.5 million
A summary of the income tax expense recorded for the three months ended September 30, 2013 and 2012 is as follows:
(In thousands)
 
Three Months Ended September 30,
 
 
2013
 
2012
 
 
(Unaudited)
Income before taxes
 
$
2,112

 
$
3,420

 
 
 
 
 
Income tax expense at statutory rate
 
718

 
1,163

State income tax (net of federal tax benefit)
 
212

 
462

Valuation allowance
 
(735
)
 
(1,501
)
Other permanent items
 
111

 
317

Income tax expense
 
$
306

 
$
441


As of September 30, 2013 and June 30, 2013 the Company had not recognized the following tax benefits in its consolidated financial statements:  
 
 
As of  
(In thousands)
 
 
 
 
 
(Unaudited)
 
 
Total unrecognized tax benefits*
 
$
3,211

 
$
3,211

Unrecognized tax benefits that, if recognized, would affect the Company's effective tax rate, subject to the valuation allowance*
 
$
3,064

 
$
3,064

____________
 
* Excluding interest and penalties
The Company believes it is reasonably possible that none of its total unrecognized tax benefits could be released in the next 12 months.

21


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

Note 12. Earnings (Loss) Per Common Share 
 
 
Three Months Ended September 30,
 
2013
 
2012
(In thousands, except share and per share amounts)
 
(Unaudited)
Net income attributable to common stockholders—basic
 
$
1,790

 
$
2,944

Net income attributable to nonvested restricted stockholders
 
16

 
35

Total net income
 
$
1,806

 
$
2,979

 
 
 
 
 
Weighted average shares outstanding—basic
 
15,802,160

 
15,490,365

Effect of dilutive securities:
 
 
 
 
Shares issuable under stock options
 
58,205

 

Weighted average shares outstanding—diluted
 
15,860,365

 
15,490,365

Net income per common share—basic
 
$
0.11

 
$
0.19

Net income per common share—diluted
 
$
0.11

 
$
0.19


22



Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
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. These forward-looking statements can be identified by the use of words like “anticipates,” “estimates,” “projects,” “expects,” “plans,” “believes,” “intends,” “will,” “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 the Securities and Exchange Commission (the “SEC”). Factors that could cause actual results to differ materially from those in forward-looking statements include, but are not limited to, the relative effectiveness of compensation-based employee incentives in causing improvements in  Company performance, the capacity to meet the demands of the Company’s 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 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 impact of a weaker 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, changes in the quality or dividend stream of third parties’ securities and other investment vehicles in which we have invested our assets, as well as other risks described in this report and other factors described from time to time in our filings with the SEC. The results of operations for the three months ended September 30, 2013 and 2012 are not necessarily indicative of the results that may be expected for any future period.
Liquidity and Capital Resources
Credit Facility
On September 12, 2011, we entered into an Amended and Restated Loan and Security Agreement (the “Loan Agreement”) among the Company and CBI, as Borrowers, certain of the Company’s other subsidiaries, as Guarantors, the Lenders party thereto, and Wells Fargo Bank, National Association ("Wells Fargo"), as Agent.
On January 9, 2012, the Loan Agreement was amended in connection with JPMorgan Chase Bank, N.A. (“JPMorgan Chase”), becoming an additional Lender thereunder. On March 18, 2013, the Loan Agreement was amended further (“Amendment No. 2") to amend the definition of "Maximum Credit" available thereunder to $75.0 million from $85.0 million. Pursuant to Amendment No. 2, Wells Fargo will provide a commitment of $53.0 million and JPMorgan Chase will provide a commitment of $22.0 million.
The Loan Agreement provides for a senior secured revolving credit facility of up to $75.0 million, with a letter of credit sublimit of $20.0 million. The revolving credit facility provides for advances of 85% of eligible accounts receivable and 75% of eligible inventory (subject to a $60.0 million inventory loan limit), as defined. The Loan Agreement provides for interest rates based on modified Monthly Average Excess Availability levels with a range of PRIME + 0.25% to PRIME + 0.75% or Adjusted Eurodollar Rate + 2.0% to Adjusted Eurodollar Rate + 2.5%. The Loan Agreement has an amendment fee of 0.375% and an unused line fee of 0.25%. Outstanding obligations under the Loan Agreement are collateralized by all of the Borrowers’ assets, including the Company’s preferred stock portfolio. The term of the Loan Agreement expires on March 2, 2015.
The Loan Agreement contains a variety of affirmative and negative covenants of types customary in an asset-based lending facility, including those relating to reporting requirements, maintenance of records, properties and corporate existence, compliance with laws, incurrence of other indebtedness and liens, limitations on certain payments, including the payment of dividends and capital expenditures, and transactions and extraordinary corporate events. The Loan Agreement allows us to pay dividends, provided, among other things, certain liquidity requirements are met, the aggregate amount of all such payments in any fiscal year shall not exceed $7.0 million ($1.75 million in any fiscal quarter), and no event of default exists or has occurred and is continuing as of the date of any such payment and after giving effect thereto. The Loan Agreement also contains financial covenants requiring the Borrowers to maintain minimum Excess Availability and Total Liquidity levels. The Loan Agreement allows the Lenders to establish reserve requirements, which may reduce the amount of credit otherwise available to us, to

23



reflect events, conditions, or risks that would have a reasonable likelihood of adversely affecting the Lender’s collateral or our assets, including our green coffee inventory.
The Loan Agreement provides that an event of default includes, among other things, subject to certain grace periods: (i) payment defaults; (ii) failure by any guarantor to perform any guarantee in favor of Lender; (iii) failure to abide by loan covenants; (iv) default with respect to other material indebtedness; (v) final judgment in a material amount not discharged or stayed; (vi) any change of control; (vii) bankruptcy or insolvency; and (viii) the failure of the Farmer Bros. Co. Employee Stock Ownership Benefit Trust, created by the Company to implement the Farmer Bros. Co. Employee Stock Ownership Plan ("ESOP"), to be duly qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended, or exempt from federal income taxation, or if the ESOP engages in a material non-exempt prohibited transaction.
Effective December 1, 2012, we entered into an interest rate swap transaction utilizing a notional amount of $10.0 million and a maturity date of March 1, 2015. We entered into the swap transaction to effectively fix the future interest rate during the applicable period on a portion of our borrowings under the revolving credit facility. The swap transaction is intended to manage our interest rate risk related to our borrowings under the revolving credit facility and requires us to pay a fixed rate of 0.48% per annum in exchange for a variable interest rate based on 1-month USD LIBOR-BBA. As of September 30, 2013, the variable interest rate based on 1-month USD LIBOR-BBA was 0.18%.
We have not designated our interest rate swap as an accounting hedge. We record the interest rate swap on our consolidated balance sheet at fair value with the changes in fair value recorded as gain or loss in “Other, net” in our consolidated statements of operations. In the three months ended September 30, 2013, we recorded a loss of $7,000 for the change in fair value of our interest rate swap. No such gains or losses were recorded in the three months ended September 30, 2012.
On September 30, 2013, we were eligible to borrow up to a total of $64.9 million under the credit facility. As of September 30, 2013, we had outstanding borrowings of $20.2 million, including loan extension fees of $0.1 million, utilized $11.2 million of the letters of credit sublimit, and had excess availability under the credit facility of $33.5 million. In connection with entering into the interest rate swap agreement on December 1, 2012, we reclassified $10.0 million of our borrowings under the credit facility as long-term because we intend to repay the borrowings in accordance with the termination date of the swap agreement which extends beyond one year. The weighted average interest rate on our outstanding borrowings under the credit facility was 1.61% at September 30, 2013. We believe that the carrying value of our outstanding borrowings under the credit facility approximates fair value at September 30, 2013 as the credit facility bears interest at a variable interest rate based on prevailing market conditions.
As of September 30, 2013, we were in compliance with all restrictive covenants under the Loan Agreement. On October 3, 2013, we and Wells Fargo entered into a Letter Agreement regarding Waiver of Event of Default (the “Waiver Agreement”) pursuant to which Wells Fargo, as Agent, and the Lenders agreed to waive the event of default arising under the Loan Agreement as a result of our failure to furnish, in a timely manner, our audited consolidated financial statements and unaudited consolidating financial statements, and the accompanying notes thereto, together with the unqualified opinion of independent certified public accountants with respect to the audited consolidated financial statements, for the fiscal year ended June 30, 2013; provided that we furnish to Agent such financial information not later than October 15, 2013. We provided the required financial information to Wells Fargo on October 9, 2013. There can be no assurance that the Lenders will issue a waiver or grant an amendment to the covenants in future periods, if the Company required one.
As of October 31, 2013, we had estimated outstanding borrowings of $25.5 million, including loan extension fees of $0.1 million, utilized $11.2 million of the letters of credit sublimit, and had excess availability under the credit facility of $31.9 million. As of October 31, 2013, the weighted average interest rate on our outstanding borrowings under the credit facility was 2.00%.
Liquidity
We generally finance our operations through cash flow from operations and borrowings under our revolving credit facility described above. As of September 30, 2013, we had $4.9 million in cash and cash equivalents, $6.3 million in restricted cash representing cash held on deposit in margin accounts for coffee-related derivative instruments and $20.4 million in short-term investments. We believe our revolving credit facility, to the extent available, in addition to our cash flows from operations and other liquid assets, are sufficient to fund our working capital and capital expenditure requirements for the next 12 months.
We generate cash from operating activities primarily from cash collections related to the sale of our products. Net cash provided by operating activities was $7.3 million in the three months ended September 30, 2013 compared to $3.7 million in

24



the three months ended September 30, 2012. The increase in net cash provided by operating activities in the three months ended September 30, 2013 compared to the three months ended September 30, 2012 was primarily due to higher level of cash inflows from operating activities and a lower level of non-operational gains such as net gains on sales of assets.
Net cash used in investing activities was $4.5 million in three months ended September 30, 2013 compared to net cash provided by investing activities of $0.2 million in three months ended September 30, 2012, primarily due to a higher level of cash inflows in the prior comparable period from sales of fixed assets, primarily real estate.
Net cash used in financing activities was $0.6 million in the three months ended September 30, 2013 compared to $5.2 million in the three months ended September 30, 2012. Net cash used in financing activities in the three months ended September 30, 2013 included net borrowings on our credit facility of $0.2 million, compared to net repayments of $(4.5) million in the three months ended September 30, 2012.
In three months ended September 30, 2013, we capitalized $4.8 million in property, plant and equipment purchases which included $3.1 million in expenditures to replace normal wear and tear of coffee brewing equipment, $0.1 million in building and facility improvements, $1.3 million in expenditures for vehicles, and machinery and equipment, and $0.3 million in information technology related expenditures.
Our expected capital expenditures for fiscal 2014 include expenditures to replace normal wear and tear of coffee brewing equipment, vehicles, and machinery and equipment, and are expected to increase approximately 33% from fiscal 2013 levels.
Our working capital is comprised of the following: 
(In thousands)
 
 
 
 
(Unaudited)
 
 
Current assets
 
$
146,111

 
$
139,749

Current liabilities
 
79,395

 
76,550

Working capital
 
$
66,716

 
$
63,199

Liquidity Information:
(In thousands)
 
 
 
 
(Unaudited)
Capital expenditures
 
$
4,757

 
$
3,572

Results of Operations
Net sales in the fiscal quarter ended September 30, 2013 increased $9.4 million, or 7.9%, to $128.6 million from $119.2 million in the fiscal quarter ended September 30, 2012, primarily due to increases in sales of our coffee and tea products.
Cost of goods sold in the fiscal quarter ended September 30, 2013 increased $4.6 million, or 6.1%, to $79.1 million, or 61.5% of net sales, from $74.5 million, or 62.6% of net sales, in the fiscal quarter ended September 30, 2012. The decrease in cost of goods sold as a percentage of net sales in the fiscal quarter ended September 30, 2013 is primarily due to a 17% decrease in the average cost of green coffee purchased, partially offset by $2.2 million in coffee-related derivative losses reclassified into cost of goods sold.
Gross profit in the fiscal quarter ended September 30, 2013 increased $4.9 million, or 10.9%, to $49.5 million from $44.6 million in the fiscal quarter ended September 30, 2012. Gross margin increased to 38.5% in the fiscal quarter ended September 30, 2013 from 37.4% in the fiscal quarter ended September 30, 2012. The increases in gross profit and gross margin were primarily due to the increase in sales and a 17% decrease in the average cost of green coffee purchased in the fiscal quarter ended September 30, 2013, partially offset by $2.2 million in coffee-related derivative losses reclassified into cost of goods sold.
In the fiscal quarter ended September 30, 2013, operating expenses increased $0.6 million, or 1.3%, to $46.6 million, or 36.2% of net sales, from $46.0 million, or 38.6% of net sales, in the fiscal quarter ended September 30, 2012. The increase in operating expenses in the fiscal quarter ended September 30, 2013 is primarily due to higher payroll and related expenses, and other expenses incurred in the first quarter of fiscal 2014 in connection with the restatement of certain prior period financial statements included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2013.

25



Income from operations in the fiscal quarter ended September 30, 2013 was $2.9 million compared to loss from operations of $(1.4) million in the fiscal quarter ended September 30, 2012, primarily due to the improvement in gross profit.
Total other expense in the fiscal quarter ended September 30, 2013 was $(0.8) million compared to total other income of $4.8 million in the fiscal quarter ended September 30, 2012, primarily due to lower net gains on sales of assets of $0.1 million in the fiscal quarter ended September 30, 2013 compared to $3.2 million in the fiscal quarter ended September 30, 2012, primarily from sales of real estate. Total other expense in the first quarter of fiscal 2014 included $(0.8) million in net losses on coffee-related derivatives and $(0.7) million in net losses from investments compared to $0.7 million in net gains on coffee-related derivatives and $0.1 million in net gains from investments in the first quarter of the prior fiscal year. Total other income in the first quarter of the prior fiscal year also included $0.8 million in recovery of a note receivable previously deemed uncollectible.
Prior to April 1, 2013, none of our derivative instruments was designated as an accounting hedge. Beginning April 1, 2013, we implemented procedures following the guidelines of ASC 815, "Derivatives and Hedging" ("ASC 815"), to enable us to account for certain coffee-related derivatives as accounting hedges in order to minimize the volatility created in our quarterly results from utilizing these derivative contracts and to improve comparability between reporting periods. Net losses from coffee-related derivative instruments not designated as accounting hedges recorded in "Other, net" in the fiscal quarter ended September 30, 2013 were $(0.3) million compared to net gains of $0.7 million in the fiscal quarter ended September 30, 2012. For the fiscal quarter ended September 30, 2013, we recognized $(0.5) million million in losses on coffee-related derivative instruments designated as cash flow hedges due to ineffectiveness.
In the fiscal quarter ended September 30, 2013, we recorded an income tax expense of $0.3 million compared to $0.4 million in the fiscal quarter ended September 30, 2012.
As a result of the foregoing factors, we recorded net income of $1.8 million, or $0.11 per common share, in the fiscal quarter ended September 30, 2013 compared to $3.0 million, or $0.19 per common share, in the fiscal quarter ended September 30, 2012.
Non-GAAP Financial Measures
In addition to net income (loss) determined in accordance with GAAP, we use certain non-GAAP financial measures, including “EBITDAE,” in assessing our operating performance. We believe this non-GAAP measure serves as an appropriate measure to be used in evaluating the performance of our business.
We define “EBITDAE” as net income (loss) excluding the impact of income taxes, interest expense, depreciation and amortization expense, ESOP and share-based compensation expense, non-cash impairment losses, pension withdrawal expense, and "Other, net," which includes net gains and losses from derivatives and investments, and net gains and losses on sales of assets. We reference this particular non-GAAP financial measure frequently in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical operating performance of prior periods. In addition, incentive compensation is based, in part, on EBITDAE and we base certain of our forward-looking estimates on EBITDAE to facilitate quantification of planned business activities and enhance subsequent follow-up with comparisons of actual to planned EBITDAE. EBITDAE 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.

26



Set forth below is a reconciliation of reported net income to EBITDAE: 
 
 
Three Months Ended September 30,
(In thousands)
 
2013
 
2012
 
 
(Unaudited)
Net income, as reported (1)
 
$
1,806

 
$
2,979

Income tax expense
 
306

 
441

Interest expense
 
372

 
457

Depreciation and amortization expense
 
7,424

 
8,340

ESOP and share-based compensation expense
 
904

 
823

Other, net (1)
 
783

 
(4,945
)
EBITDAE
 
$
11,595

 
$
8,095

 ______________
(1)
Includes: (a) $0.1 million in net gains from sales of assets, primarily real estate, in the three months ended September 30, 2013; and (b) $3.2 million in net gains from sales of assets, primarily real estate, and $0.8 million in recovery of a note receivable previously deemed uncollectible in the three months ended September 30, 2012. Excludes $3.1 million in losses from coffee-related derivatives designated as cash flow hedges in the three months ended September 30, 2013.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We are exposed to market value risk arising from changes in interest rates on our securities portfolio. Our portfolio of preferred securities has sometimes included investments in derivatives that provide a natural economic hedge of interest rate risk. We review the interest rate sensitivity of these securities and may enter into “short positions” in futures contracts on U.S. Treasury securities or hold put options on such futures contracts to reduce the impact of certain interest rate changes. Specifically, we attempt to manage the risk arising from changes in the general level of interest rates. We do not transact in futures contracts or put options for speculative purposes. The number and type of futures and options contracts entered into depends on, among other items, the specific maturity and issuer redemption provisions for each preferred stock held, the slope of the Treasury yield curve, the expected volatility of U.S. Treasury yields, and the costs of using futures and/or options.
The following table demonstrates the impact of varying interest rate changes based on our preferred securities holdings and market yield and price relationships at September 30, 2013. This table is predicated on an “instantaneous” change in the general level of interest rates and assumes predictable relationships between the prices of our preferred securities holdings and the yields on U.S. Treasury securities. At September 30, 2013, we had no futures contracts or put options with respect to our preferred securities portfolio designated as interest rate risk hedges.
 
 
Market Value of
Preferred
Securities at 
 
Change in  Market
Value
Interest Rate Changes
 
(In thousands)
 –150 basis points
 
$
21,150

 
$
725

 –100 basis points
 
$
20,935

 
$
510

 Unchanged
 
$
20,425

 
$

 +100 basis points
 
$
19,806

 
$
(619
)
 +150 basis points
 
$
19,501

 
$
(924
)

The Loan Agreement for our revolving credit facility provides for interest rates based on modified Monthly Average Excess Availability levels with a range of PRIME + 0.25% to PRIME + 0.75% or Adjusted Eurodollar Rate + 2.0% to Adjusted Eurodollar Rate + 2.5%. Effective December 1, 2012, we entered into an interest rate swap transaction utilizing a notional amount of $10.0 million and a maturity date of March 1, 2015. We entered into the swap transaction to effectively fix the future interest rate during the applicable period on a portion of our borrowings under our revolving credit facility. In connection with

27



entering into the interest rate swap agreement on December 1, 2012, we reclassified $10.0 million of our borrowings under the revolving credit facility as long-term because we intend to repay the borrowings in accordance with the termination date of the swap agreement which extends beyond one year. The swap transaction is intended to manage our interest rate risk related to our borrowings under our revolving credit facility and requires us to pay a fixed rate of 0.48% per annum in exchange for a variable interest rate based on 1-month USD LIBOR-BBA. As of September 30, 2013, the variable interest rate based on 1-month USD LIBOR-BBA was 0.18%.
We have not designated our interest rate swap as an accounting hedge. We record the interest rate swap on our consolidated balance sheet at fair value with the changes in fair value recorded as gain or loss in "Other, net" in our consolidated statements of operations. In the three months ended September 30, 2013, we recorded a loss of $7,000 for the change in fair value of our interest rate swap. No such loss was recorded in the three months ended September 30, 2012.
As of September 30, 2013, we had outstanding borrowings of $20.2 million, including loan extension fees of $0.1 million, utilized $11.2 million of the letters of credit sublimit, and had excess availability under the credit facility of $33.5 million. The weighted average interest rate on our outstanding borrowings under the credit facility at September 30, 2013 was 1.61%.
The following table demonstrates the impact of interest rate changes on our annual interest expense under the revolving credit facility based on the outstanding balance and interest rate as of September 30, 2013
 
 
Interest Rate
 
Annual Interest Expense
Interest Rate Changes
 
 
 
(In thousands)
 –100 basis points
 
0.61
%
 
$
123

 –50 basis points
 
1.11
%
 
$
225

 Unchanged
 
1.61
%
 
$
326

 +50 basis points
 
2.11
%
 
$
427

 +100 basis points
 
2.61
%
 
$
528

Commodity Price Risk
We are exposed to commodity price risk arising from changes in the market price of green coffee. We value green coffee inventory on the last in, first out basis. In the normal course of business we hold a large green coffee inventory and enter into forward commodity purchase agreements with suppliers. We are subject to price risk resulting from the volatility of green coffee prices. Due to competition and market conditions, volatile price increases cannot always be passed on to our customers.
We routinely purchase exchange traded coffee contracts to enable us to lock in green coffee prices within a pre-established range, and hold a mix of futures contracts and options to help hedge against volatility in green coffee prices. Prior to April 1, 2013, none of our derivative instruments was designated as an accounting hedge. Beginning April 1, 2013, we implemented procedures following the guidelines of ASC 815 to enable us to account for certain coffee-related derivatives as accounting hedges in order to minimize the volatility created in our quarterly results from utilizing these derivative contracts and to improve comparability between reporting periods.
When coffee-related futures contracts are designated as cash flow hedges, we formally document the hedging instruments and hedged items, and measure at each balance sheet date the effectiveness of our hedges. Beginning in the fourth quarter of fiscal 2013, the effective portion of the change in fair value of the derivative is reported as accumulated other comprehensive income (loss) (“AOCI”) and subsequently reclassified into cost of goods sold in the period or periods when the hedged transaction affects earnings. In the three months ended September 30, 2013, we reclassified $2.2 million in net losses into cost of goods sold from AOCI. Any ineffective portion of the derivative's change in fair value is recognized currently in “Other, net.” Gains or losses deferred in AOCI associated with terminated derivatives, derivatives that cease to be highly effective hedges, derivatives for which the forecasted transaction is reasonably possible but no longer probable of occurring, and cash flow hedges that have been otherwise discontinued remain in AOCI until the hedged item affects earnings. If it becomes probable that the forecasted transaction designated as the hedged item in a cash flow hedge will not occur, we recognize any gain or loss deferred in AOCI in “Other, net” at that time. For the three months ended September 30, 2013, we recognized in "Other, net" $(0.5) million in losses on coffee-related derivative instruments designated as cash flow hedges due to ineffectiveness.
For derivative instruments that are not designated in a hedging relationship, and for which the normal purchases and normal sales exception has not been elected, the changes in fair value are reported in “Other, net.”

28



For the three months ended September 30, 2013 and 2012, we recorded net (losses) gains from coffee-related derivative instruments not designated as accounting hedges in "Other, net" in the amounts of $(0.3) million and $0.7 million, respectively (see Note 2 to the consolidated financial statements).
The following table summarizes the potential impact as of September 30, 2013 to net income and OCI from a hypothetical 10% change in coffee commodity prices. The information provided below relates only to the coffee-related derivative instruments and does not represent the corresponding changes in the underlying hedged items:
 
 
 
Increase (Decrease) to Net Income
 
Increase (Decrease)  to OCI
 
10% Increase in Underlying Rate
 
10% Decrease in Underlying Rate
 
10% Increase in Underlying Rate
 
10% Decrease in Underlying Rate
 
 
 
 
(In thousands)
 
Coffee-related derivative instruments
 
$
601

 
$
(601
)
 
$
5,718

 
$
(5,718
)

29



Item 4.
Controls and Procedures
Disclosure Controls and Procedures
Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the"Exchange Act"), are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
As of September 30, 2013, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15(e) promulgated under the Exchange Act. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were not effective as of September 30, 2013. This conclusion was based on the material weakness identified in our internal control over financial reporting related to our accounting for postretirement benefit obligations, as described below.
Changes in Internal Control Over Financial Reporting
As described in Item 9A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2013 filed with the SEC on October 9, 2013, our management identified a material weakness in our internal control over our accounting for postretirement benefit obligations. Our controls did not properly identify the failure to apply generally accepted accounting principles with respect to the accounting for death benefits and the related cash surrender value of life insurance, and did not properly detect when changes or amendments to other postretirement benefit plans occurred that should have resulted in changes to the related benefit plan obligations. As a result, material errors to the recorded postretirement benefit liability, postretirement death benefit liability and cash surrender value of life insurance purchased to fund the postretirement death benefit occurred and were not timely detected. As a result, our management concluded that, as of June 30, 2013, our internal control over financial reporting was not effective due to this material weakness.
To remediate the material weakness described above, we are currently evaluating the controls and procedures we will design and put in place to address this material weakness and plan to implement appropriate measures as part of this effort. These controls and procedures may include:
engagement of independent consultants to review the Company's other postretirement benefit obligation controls and to make recommendations to address the design gaps in these controls;
retention of additional knowledgeable accounting personnel to review the accuracy of data and plan information provided to actuaries engaged to perform valuation services;
design of processes to facilitate improved interaction among human resources, external actuaries and accounting personnel; and
additional focused training of our finance personnel in the area of accounting and reporting for our other postretirement obligations, including any changes in the relevant accounting guidance and timely adoption thereof.
However, the material weakness will not be considered remediated until the applicable remedial controls are implemented and operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Except as described above, there has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act) during our fiscal quarter ended September 30, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


30


Part II - OTHER INFORMATION
Item 6.
Exhibits
 
See Exhibit Index.

31



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
FARMER BROS. CO.
 
 
 
 
By:
 
/S/MICHAEL H. KEOWN
 
 
 
Michael H. Keown
President and Chief Executive Officer
(chief executive officer)
Date: November 7, 2013
 
 
 
 
By:
 
/s/MARK J. NELSON     
 
 
 
Mark J. Nelson
Treasurer and Chief Financial Officer
(principal financial and accounting officer)
Date: November 7, 2013




32



EXHIBIT INDEX
3.1
  
Certificate of Incorporation (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2009 filed with the SEC on May 11, 2009 and incorporated herein by reference).
 
 
3.2
  
Amended and Restated Bylaws (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 25, 2011 and incorporated herein by reference).
 
 
4.1
  
Certificate of Designation, Preferences and Rights of Series A Junior Participating Preferred Stock (filed as Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed with the SEC on May 10, 2010 and incorporated herein by reference).
 
 
4.2
  
Rights Agreement, dated March 17, 2005, by and between Farmer Bros. Co. and Wells Fargo Bank, N.A., as Rights Agent (filed as Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2010 filed with the SEC on May 10, 2010 and incorporated herein by reference).
 
 
4.3
  
Specimen Stock Certificate (filed as Exhibit 4.1 to the Company’s Form 8-A/A filed with the SEC on February 6, 2009 and incorporated herein by reference).
 
 
 
10.1
  
Amended and Restated Loan and Security Agreement, dated September 12, 2011, by and among Farmer Bros. Co. and Coffee Bean International, Inc., as Borrowers, Coffee Bean Holding Co., Inc. and FBC Finance Company, as Guarantors, the Lenders party thereto, and Wells Fargo Bank, National Association, as Agent (filed as Exhibit 10.12 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011 filed with the SEC on September 12, 2011 and incorporated herein by reference).
 
 
10.2
 
Amendment No. 1 to Amended and Restated Loan and Security Agreement, effective January 9, 2012, by and among Farmer Bros. Co. and Coffee Bean International, Inc., as Borrowers, Coffee Bean Holding Co., Inc. and FBC Finance Company, as Guarantors, the Lenders party thereto, and Wells Fargo Bank, National Association, as Agent (filed as Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2011 filed with the SEC on February 8, 2012 and incorporated herein by reference).
 
 
 
10.3
 
Amendment No. 2 to Amended and Restated Loan and Security Agreement, dated as of March 18, 2013, by and among Farmer Bros. Co. and Coffee Bean International, Inc., as Borrowers, Coffee Bean Holding Co., Inc. and FBC Finance Company, as Guarantors, the Lenders party thereto, and Wells Fargo Bank, National Association, as Agent (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 20, 2013 and incorporated herein by reference).
 
 
10.4
 
Letter Agreement regarding Waiver of Event of Default, dated October 3, 2013, by and among Farmer Bros. Co. and Coffee Bean International, Inc., as Borrowers, Coffee Bean Holding Co., Inc. and FBC Finance Company, as Guarantors, the Lenders party thereto, and Wells Fargo Bank, National Association, as Agent (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 4, 2013 and incorporated herein by reference).

 
 
 
10.5
 
ISDA Master Agreement, dated as of November 19, 2012, by and between Farmer Bros. Co. and Wells Fargo Bank, N.A. (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on November 26, 2012 and incorporated herein by reference).
 
 
 
10.6
 
Schedule to the ISDA Master Agreement, dated as of November 19, 2012, by and between Farmer Bros. Co. and Wells Fargo Bank, N.A. (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on November 26, 2012 and incorporated herein by reference).
 
 
 
10.7
 
Farmer Bros. Co. Pension Plan for Salaried Employees (filed as Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 filed with the SEC on November 5, 2012 and incorporated herein by reference).*
 
 
 

33



10.8
  
Amendment No. 1 to Farmer Bros. Co. Retirement Plan effective June 30, 2011 (filed as Exhibit 10.14 to the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2011 filed with the SEC on September 12, 2011 and incorporated herein by reference).*
 
 
 
10.9
 
Action of the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement Plans amending the Farmer Bros. Co. Retirement Plan, effective as of December 6, 2012 (filed as Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2012 filed with the SEC on February 6, 2013 and incorporated herein by reference).*

 
 
10.10
  
Farmer Bros. Co. 2005 Incentive Compensation Plan (Amended and Restated as of December 31, 2008) (filed as Exhibit 10.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2008 filed with the SEC on February 10, 2009 and incorporated herein by reference).*
 
 
10.11
  
Farmer Bros. Co. Amended and Restated Employee Stock Ownership Plan, as adopted by the Board of Directors on December 9, 2010 and effective as of January 1, 2010 (filed as Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2010 filed with the SEC on February 9, 2011 and incorporated herein by reference).*
 
 
 
10.12
 
Action of the Administrative Committee of the Farmer Bros. Co. Qualified Employee Retirement Plans amending the Farmer Bros. Co. Amended and Restated Employee Stock Ownership Plan, effective as of January 1, 2012 (filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2012 filed with the SEC on November 5, 2012 and incorporated herein by reference).*
 
 
 
10.13
  
ESOP Loan Agreement including ESOP Pledge Agreement and Promissory Note, dated March 28, 2000, between Farmer Bros. Co. and Wells Fargo Bank, N.A., Trustee for the Farmer Bros Co. Employee Stock Ownership Plan (filed as Exhibit 10.13 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2010 filed with the SEC on February 9, 2011 and incorporated herein by reference).
 
 
10.14
  
Amendment No. 1 to ESOP Loan Agreement, dated June 30, 2003, between Farmer Bros. Co. and Wells Fargo Bank, N.A., Trustee for the Farmer Bros Co. Employee Stock Ownership Plan (filed as Exhibit 10.14 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2010 filed with the SEC on February 9, 2011 and incorporated herein by reference).
 
 
10.15
  
ESOP Loan Agreement No. 2 including ESOP Pledge Agreement and Promissory Note, dated July 21, 2003 between Farmer Bros. Co. and Wells Fargo Bank, N.A., Trustee for the Farmer Bros Co. Employee Stock Ownership Plan (filed as Exhibit 10.15 to the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2010 filed with the SEC on February 9, 2011 and incorporated herein by reference).
 
 
10.16
 
Employment Agreement, dated March 9, 2012, by and between Farmer Bros. Co. and Michael H. Keown (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 13, 2012 and incorporated herein by reference).*
 
 
 
10.17
 
Second Amended and Restated Employment Agreement, effective as of February 13, 2012, by and between
Farmer Bros. Co. and Jeffrey A. Wahba (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K
 
 
 
10.18
 
Consulting Services Agreement, effective as of March 1, 2013, between Farmer Bros. Co. and Jeffrey A. Wahba (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on February 28, 2013 and incorporated herein by reference).*
 
 
 
10.19
 
Letter Agreement by and between Farmer Bros. Co. and Jeffrey A. Wahba (filed as Exhibit 10.7 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2013 and incorporated herein by reference).*
 
 
 
10.20
 
Employment Agreement, dated as of April 4, 2012, by and between Farmer Bros. Co. and Thomas W.
Mortensen (filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K/A filed with the SEC on April
 
 
 

34



10.21
  
Amended and Restated Employment Agreement, effective as of February 13, 2012, by and between Farmer
Bros. Co. and Patrick G. Criteser (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed
 
 
 
10.22
 
Resignation Agreement, dated as of July 20, 2012, by and between Farmer Bros. Co. and Larry B. Garrett (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K/A filed with the SEC on July 24, 2012 and incorporated herein by reference).*
 
 
 
10.23
 
Employment Agreement, dated as of April 1, 2013, by and between Farmer Bros. Co. and Mark J. Nelson (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2013 and incorporated herein by reference).*
 
 
 
10.24
  
Farmer Bros. Co. 2007 Omnibus Plan, as amended (as approved by the stockholders at the 2012 Annual Meeting of Stockholders on December 6, 2012) (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on December 12, 2012 and incorporated herein by reference).*
10.25
  
Form of 2007 Omnibus Plan Stock Option Grant Notice and Stock Option Agreement (filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on April 4, 2013 and incorporated herein by reference).*
 
 
10.26
  
Form of 2007 Omnibus Plan Restricted Stock Award Grant Notice and Restricted Stock Award Agreement (filed as Exhibit 10.3 to the Company’s Current Report on Form 8-K filed with the SEC on April 4, 2013 and incorporated herein by reference).*
 
 
10.27
  
Stock Ownership Guidelines for Directors and Executive Officers (filed as Exhibit 10.4 to the Company’s Current Report on Form 8-K filed with the SEC on April 4, 2013 and incorporated herein by reference).*
 
 
 
10.28
 
Form of Award Letter (Fiscal 2012) under Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on September 24, 2012 and incorporated herein by reference).*
 
 
 
10.29
 
Form of Target Award Notification Letter (Fiscal 2013) under Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on September 28, 2012 and incorporated herein by reference).*

 
 
 
10.30
 
Form of Award Letter (Fiscal 2013) under Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on October 15, 2013 and incorporated herein by reference).*
 
 
 
10.31
 
Form of Target Award Notification Letter (Fiscal 2014) under Farmer Bros. Co. 2005 Incentive Compensation Plan (filed as Exhibit 10.2 to the Company's Current Report on Form 8-K filed with the SEC on October 15, 2013 and incorporated herein by reference).*
 
 
 
10.32
  
Form of Change in Control Severance Agreement for Executive Officers of the Company (with schedule of executive officers attached) (filed as Exhibit 10.6 to the Company’s Current Report on Form 8-K filed with the SEC on April 4, 2013 and incorporated herein by reference).*
 
 
10.33
 
Form of Indemnification Agreement for Directors and Officers of the Company, as adopted on May 18, 2006 and as amended on December 31, 2008 (with schedule of indemnitees attached) (filed as Exhibit 10.5 to the Company's Current Report on Form 8-K filed with the SEC on April 4, 2013 and incorporated herein by reference).*
 
 
 
31.1
  
Principal Executive Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
31.2
  
Principal Financial and Accounting Officer Certification Pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 
32.1
  
Principal Executive Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
 
 

35



32.2
  
Principal Financial and Accounting Officer Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
 
 
101
 
The following financial statements from the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2013, formatted in eXtensible Business Reporting Language: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) Consolidated Statements of Cash Flows and (v) Notes to Consolidated Financial Statements (furnished herewith).

________________
*
Management contract or compensatory plan or arrangement.


36

Dates Referenced Herein   and   Documents Incorporated By Reference

This 10-Q Filing   Date   Other Filings
3/28/00
6/30/0310-K, 10-K/A, 8-K, DEF 14A, PRE 14A
7/21/03
3/17/058-K
5/18/068-K
8/23/073, 8-K, 8-K/A
12/6/073, 8-K, DEF 14A
12/31/0810-Q, NT 10-Q
2/6/098-A12B, S-8
2/10/0910-Q, 8-K, NT 10-Q
3/31/0910-Q
5/11/0910-Q
1/1/10
3/31/1010-Q
5/10/1010-Q, 8-K
12/9/104, 8-K, DEF 14A
12/31/1010-Q
2/9/1110-Q, 8-K
4/25/118-K
6/30/1110-K
9/12/118-K
12/31/1110-Q
1/1/12
1/9/124
2/8/1210-Q, 8-K
2/13/124, 8-K, SC 13G/A
2/17/128-K
3/9/128-K
3/13/128-K
4/4/12
4/10/128-K/A
7/20/128-K
7/24/128-K/A
9/15/12
9/24/128-K
9/28/128-K
9/30/1210-Q
11/5/1210-Q, 8-K
11/19/128-K
11/26/128-K
12/1/12
12/6/123, 8-K
12/12/128-K
12/15/12
12/31/1210-Q
1/1/13
2/6/1310-Q, 8-K
2/28/138-K
3/1/134
3/18/138-K
3/20/138-K
4/1/138-K
4/4/138-K
6/30/1310-K
7/1/138-K
8/30/13
For The Period Ended9/30/138-K
10/3/138-K
10/4/138-K
10/9/1310-K, 8-K
10/15/138-K
10/31/13
11/6/13
Filed On / Filed As Of11/7/13
12/15/13
6/30/14
7/1/14
3/1/15
3/2/15
6/30/17
 
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