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FARM > SEC Filings for FARM > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for FARMER BROTHERS CO

Form 10-Q for FARMER BROTHERS CO


5-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of many factors. The results of operations for the three months ended September 30, 2012 and 2011 are not necessarily indicative of the results that may be expected for any future period. The following discussion should be read in combination with the consolidated financial statements and the notes thereto included in Part I, Item 1 of this report and with the "Risk Factors" described in Part II, Item 1A of this report.
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 The Loan Agreement provides for a senior secured revolving credit facility of up to $85.0 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, subject to certain liquidity requirements. The Loan Agreement also contains financial covenants requiring the Borrowers to maintain minimum Excess Availability and Total Liquidity levels. The Loan Agreement allows the Lender to establish reserve requirements, which may reduce the amount of credit otherwise available to us, to 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. On January 9, 2012, the Loan Agreement was amended ("Amendment No. 1") in connection with JPMorgan Chase Bank, N.A. ("JPMorgan Chase"), becoming an additional Lender thereunder. Pursuant to Amendment No. 1, Wells Fargo will provide a commitment of $60.0 million and JPMorgan Chase will provide a commitment of $25.0 million. As of September 30, 2012, we had outstanding borrowings of $25.0 million, excluding loan extension fees of $0.2 million, utilized $11.9 million of the letters of credit sublimit, and had excess availability under the credit facility of $40.0 million. The weighted average interest rate on our outstanding borrowings under the Loan Agreement was 2.73% at September 30, 2012. Due to the short-term nature of the credit facility and the variable interest rate, fair value of the balance outstanding approximates carrying value. As of September 30, 2012, we were in compliance with all restrictive covenants under the Loan Agreement. There can be no assurance that the Lender will issue a waiver or grant an amendment to the covenants in future periods, if the Company required one. As of October 31, 2012, we had estimated outstanding borrowings of $24.8 million, including loan extension fees of $0.2 million, utilized $10.2 million of the letters of credit sublimit, and had excess availability under the credit facility of $41.7 million. As of October 31, 2012, the weighted average interest rate on the outstanding borrowings was 2.73%.


Liquidity
We generally finance our operations through cash flow from operations and borrowings under our revolving credit facility described above. As of September 30, 2012, we had $2.5 million in cash and cash equivalents and $20.6 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 $3.7 million in the three months ended September 30, 2012, compared with net cash used in operating activities of $33,000 in the three months ended September 30, 2011. Net cash provided by operating activities in the first quarter of fiscal 2013 was primarily due to net income, proceeds from sale of short-term investments and increase in accounts payable offset, in part, by increase in inventories. Net cash used in operating activities in the first quarter of fiscal 2012 was primarily due to net loss incurred, increase in inventory levels and decrease in accounts payable and other long-term liabilities offset, in part, by proceeds from the sale of short-term investments.
Net cash provided by investing activities decreased to $0.2 million in the first quarter of fiscal 2013, compared to net cash used in investing activities of $2.7 million in the first quarter of fiscal 2012. In the first quarter of fiscal 2013, cash inflow of $3.8 million in proceeds from sale of fixed assets offset capital expenditures of $3.6 million. In the first quarter of the prior fiscal year cash inflow from sale of fixed assets was $0.2 million and cash outflow for capital expenditures was $2.9 million.
Net cash used in financing activities was $5.2 million in fiscal 2012, compared to net cash provided by financing activities of $1.2 million in the first quarter of fiscal 2012. Cash flows related to financing activities included net repayments on our revolving line of credit of $4.5 million in the first quarter of fiscal 2013 compared to net borrowings of $1.6 million in the first quarter of fiscal 2012.
In the first quarter of fiscal 2013, we capitalized $3.6 million in property, plant and equipment purchases which included $1.9 million in expenditures to replace normal wear and tear of coffee brewing equipment, $1.5 million in expenditures for vehicles, and machinery and equipment.
Our expected capital expenditures for fiscal 2013 include expenditures to replace normal wear and tear of coffee brewing equipment, vehicles, and machinery and equipment, and are expected not to deviate significantly from fiscal 2012 levels.
Our working capital is comprised of the following:

                       September 30, 2012      June 30, 2012
(In thousands)             (Unaudited)
Current assets        $            139,678    $       135,851
Current liabilities                 89,212             92,689
Working capital       $             50,466    $        43,162


Liquidity Information:
                               Three Months Ended September 30,
(In thousands)                        2012                     2011
                                        (Unaudited)

Capital expenditures   $          3,572                      $ 2,910

Results of Operations
Net sales in the fiscal quarter ended September 30, 2012 decreased $2.0 million, or 2%, to $119.2 million as compared to $121.2 million in the fiscal quarter ended September 30, 2011. The decrease was primarily due to a decrease in sales of our coffee products. Although coffee product sales unit volume increased, net sales dollars decreased slightly because of increase in sales to our national account customers who buy our coffee products at prices that closely track the coffee prices in the commodity markets which decreased substantially in the current quarter compared to the same period in the prior fiscal year. Gross profit in the three months ended September 30, 2012 increased $4.9 million, or 12%, to $44.6 million, as compared to $39.7 million in the three months ended September 30, 2011 primarily due to lower average cost of coffee purchased. Gross margin increased to 37% in the fiscal quarter ended September 30, 2012 from 33% in the comparable period in the prior fiscal year.


Operating expenses in the fiscal quarter ended September 30, 2012 increased $1.9 million, or 4%, to $46.2 million, or 39% of sales, from $44.3 million, or 37% of sales, in the first quarter of the prior fiscal year primarily due to higher payroll and related expenses resulting from our investments in additional sales and marketing personnel.
Total other income in the fiscal quarter ended September 30, 2012 was $4.8 million compared to total other expense of $2.6 million in the fiscal quarter ended September 30, 2011. Total other income in the fiscal quarter ended September 30, 2012 included $3.2 million in gain on sales of real estate and $0.8 million in recovery of an account previously deemed uncollectible. Additionally, total other income in the fiscal quarter ended September 30, 2012 included $0.8 million in net derivative gains compared to $2.6 million in net derivative losses in the comparable period of the prior fiscal year. Income tax expense in the three months ended September 30, 2012 was $0.4 million compared to $0.3 million in the three months ended September 30, 2011. As a result of the forgoing factors, net income in the fiscal quarter ended September 30, 2012 was $2.9 million, or $0.19 per common share, as compared to net loss of ($7.6) million, or ($0.50) per common share, during the same period in the prior fiscal year.
Non-GAAP Financial Measures
In addition to net income (loss) determined in accordance with GAAP, the Company uses certain non-GAAP financial measures, such as "EBITDAE" in assessing its operating performance. The Company believes that this non-GAAP financial measure serves as an appropriate measure to be used in evaluating the performance of its business.
The Company defines 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 and pension withdrawal expense, if any, and net gains and losses from derivatives and investments. EBITDAE as defined by the Company may not be comparable to similarly titled measures reported by other companies. The Company does not intend for non-GAAP financial measures to be considered in isolation or as a substitute for other measures prepared in accordance with GAAP.
Set forth below is a reconciliation of reported net income (loss) to EBITDAE:

                                                            Three Months Ended September 30,
(In thousands)                                                  2012                 2011
                                                                       (Unaudited)
Net income (loss), as reported(1)                        $         2,874       $        (7,584 )
Income tax expense                                                   422                   346
Interest expense                                                     457                   575
Depreciation and amortization expense                              8,340                 7,923
ESOP and share-based compensation expense                            823                   790
Net (gain) loss on derivatives and investments                      (802 )               2,621
EBITDAE(1)                                               $        12,114       $         4,671


_____________


(1) Three months ended September 30, 2012 and 2011, respectively, include $3.2 million and $0 in gain on sale of real estate.

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