Farmer Brothers Sample Assignment

1. What does Farmer Brothers do?

Farmer Brothers is a manufacturer, wholesaler and distributor of coffee, tea, and culinary products. They sell to restaurants, hotels, casinos, offices, quick service restaurants (“QSRs”), convenience stores, healthcare facilities and other foodservice providers, as well as private brand retailers in the QSR, grocery, drugstore, restaurant, convenience store, and independent coffee house channels. ("Farmer Bros. Co 10-K", 2015, p. 1)

2. What new product lines did Farmer Brothers add in fiscal year 2015?

Farmer’s Brothers launched Metropolitan single cup coffee line, expanded their seasonal coffee and specialty beverage portfolio, developed new shelf-stable coffee products, new hot teas, and added products by acquiring Rae' Launo Corporation.

In fiscal 2015, we continued to expand our product portfolio by investing resources in what we believe to be key growth categories. We launched our Metropolitan™ single cup coffee, expanded our seasonal coffee and specialty beverage portfolio, developed new shelf-stable coffee products, and introduced new hot tea product lines. In July 2015 we were recognized at the North American Iced Tea Championship with first place awards for the best unflavored black iced tea and the best flavored black iced tea (raspberry) in the foodservice category, further bolstering our efforts to provide a useful array of high-quality products and enhance our reputation within the industry. In addition, we made marked progress in expanding our Direct Trade Verified Sustainable coffee portfolio to support future growth opportunities. We also developed an in-room, single-serve brewer program for our hospitality customers and, through the RLC Acquisition, we expanded our reach into in-room coffee distribution. ("Farmer Bros. Co 10-K", 2015, p. 2)

In fiscal 2015, we continued our efforts to improve efficiencies in our sales and product offerings. These efforts included targeted selling efforts in untapped markets, sales and marketing training for all of our RSRs, and the discontinuation over 300 SKUs, excluding the SKUs added from the RLC Acquisition. We also continued to expand our product portfolio by investing resources in what we believe to be key growth categories, including the launch of our Metropolitan™ single cup coffee, expanded seasonal coffee and specialty beverages, new shelf-stable coffee products, and new hot teas. ("Farmer Bros. Co 10-K", 2015, p. 35)

3. How much did the company pay to stockholders in dividends in fiscal year 2015? What might impact the company's ability to pay dividends in future years?

No dividends were paid in fiscal 2015, 2014 and 2013. ("Farmer Bros. Co 10-K", 2015, p. 81)

The Corporate Relocation from California to Texas may negatively impact the company’s ability to pay dividends in 2016 and 2017, as may volatility in the price of green coffee. They are incurring a lot of cash costs associated with the closure of their Torrence, CA plant and corporate relocation plan. Forty-one percent of the $25 million in costs are recognized in 2015, the rest in 2016 and 2017.The $25 million in total costs do not include the building improvements that they will make in TX because they are expected to be offset by the sale of the CA facility. To this date, the company has not paid dividends since 2011. ("farmer-brothers-c-dividends")

Based on current assumptions and subject to continued implementation of the Corporate Relocation Plan as planned, we estimate that we will incur approximately $25 million in cash costs in connection with the exit of the Torrance facility consisting of $14 million in employee retention and separation benefits, $4 million in facility-related costs and $7 million in other related costs. We may incur certain other non-cash asset impairment costs, pension-related costs and postretirement benefit costs in connection with the Corporate Relocation Plan which we have not yet determined. We recognized approximately 41% of the aggregate cash costs in fiscal 2015, including $6.5 million in employee retention and separation benefits, $0.3 million in facility-related costs related to the relocation of certain distribution operations and $3.3 million in other related costs including travel, legal, consulting and other professional services. The remainder is expected to be recognized in fiscal 2016 and the first quarter of fiscal 2017. ("Farmer Bros. Co 10-K", 2015, p. 34)

4. What methods of inventory accounting does Farmer Brothers use?

Inventories are valued at the lower of cost or market. We account for coffee, tea and culinary products on the last in, first out (“LIFO”) basis, and coffee brewing equipment parts on the first in, first out (“FIFO”) basis. ("Farmer Bros. Co 10-K", 2015, p. 26)

5. On page 26, the company states the following: “As a result, we recorded $4.9 million in beneficial effect of liquidation of LIFO inventory quantities in cost of goods sold in the fiscal year ended June 30, 2015, which reduced net loss for the fiscal year ended June 30, 2015 by $4.9 million.”

1. Is $4.9 million a significant amount in relation to Farmer Brothers’ net income? Explain.

   Yes, it is about 10% of gross profits. Farmer’s Brothers’ liquidation of their LIFO layers makes their income statement look more profitable to shareholders after not paying dividends since 2011. They may also be trying to look more profitable to their line of credit holder, Bank of America.

2. Explain the meaning of the sentence quoted above.

   By liquidating their LIFO layers, Farmers Brothers was able to move their holding gains accumulated from historical pricing as a result of LIFO inventory accounting into their income layers, where it appears as a “gain.” They intentionally did this to reduce their reported net loss for fiscal year 2015. The money did not come from operating profits, but may appear to be so to the untrained eye.

3. Does Farmer Brothers speculate in commodities? Explain.

   Yes, coffee (green coffee especially) is a commodity. Their primary raw material is green coffee, an agricultural commodity. Green coffee prices are determined by worldwide forces of supply and demand, and, as a result, green coffee prices are volatile.

Our primary raw material is green coffee, an agricultural commodity. The bulk of the world's green coffee supply is grown outside the United States and can be subject to volatile price fluctuations. Weather, real or perceived supply shortages, speculation in the commodity markets, agricultural diseases and pests, political unrest, tariffs, labor actions, currency fluctuations, armed conflict in coffee producing nations and government actions, including treaties and trade controls between the U.S. and coffee producing nations, can affect the price of green coffee. Additionally, specialty green coffees sell at a premium to other green coffees because they generally taste cleaner, are fresher, have fewer overall defects. ("Farmer Bros. Co 10-K", 2015, p. 3)

6. With regard to property, plant, and equipment,

1. What method(s) of depreciation did Farmer Brothers use in its 10-K filings?

   Straight-line

2. What useful lives did it assign to its depreciable assets?

   Property, Plant and Equipment

Property, plant and equipment is carried at cost, less accumulated depreciation. Depreciation is computed using the straight-line method. The following useful lives are used:

When assets are sold or retired, the asset and related accumulated depreciation are removed from the respective account balances and any gain or loss on disposal is included in operations. Maintenance and repairs are charged to expense, and betterments are capitalized.

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 years ended June 30, 2015, 2014 and 2013 are $26.6 million, $25.9 million and $25.6 million, respectively. In addition, depreciation expense related to capitalized coffee brewing equipment reported in cost of goods sold in the fiscal years ended June 30, 2015, 2014 and 2013 was $10.4 million, $10.9 million and $12.8 million, respectively. The Company capitalized coffee brewing equipment (included in machinery and equipment) in the amounts of $10.7 million and $13.6 million in fiscal 2015 and 2014, respectively. ("Farmer Bros. Co 10-K", 2015, p. 56)

1. Farmer Brothers listed “capitalized software” as an asset. Explain what it means to have “capitalized software.”

This means that the software meets the criteria of property, plant and equipment, meaning it will be used in providing goods and services and an individual copy of the software package costs more than $100,000.

So, per the 10-K:

WE RELY ON INFORMATION TECHNOLOGY AND ARE DEPENDENT ON ENTERPRISE RESOURCE PLANNING SOFTWARE IN OUR OPERATIONS. ANY MATERIAL FAILURE, INADEQUACY, INTERRUPTION OR SECURITY FAILURE OF THAT TECHNOLOGY COULD AFFECT OUR ABILITY TO EFFECTIVELY OPERATE OUR BUSINESS.
We rely on information technology systems across our operations, including management of our supply chain, point-of-sale processing, and various other processes and transactions. Our ability to effectively manage our business and coordinate the production, distribution and sale of our products depends significantly on the reliability and capacity of these systems. The failure of these systems to operate effectively and continuously, problems with transitioning to upgraded or replacement systems, or a breach in security of these systems could result in delays in processing replenishment orders from our branch warehouses, an inability to record input costs or product sales accurately or at all, an impaired understanding of our operations and results and reduced operational efficiency. Significant capital investments could be required to remediate any potential problems.

In addition, if we are unable to prevent security breaches, we may suffer financial and reputational damage or penalties because of the unauthorized disclosure of confidential information belonging to us or to our customers or suppliers. In addition, the disclosure of non-public sensitive information through external media channels could lead to the loss of intellectual property or damage our reputation and brand image.("Farmer Bros. Co 10-K", 2015, p. 8-9)

Select a company that filed a 10-K and consult its most recent 10-K filing. If you work for a publically traded company, you may wish to select this company. Or, you may wish to select a competitor, a major supplier, or a company in which you might invest. The choice is yours.

Huntington Ingalls Industries

1. Why did you select this company?

Cory works for Newport News Shipbuilding, a subsidiary of HII.

History and Organization

For more than a century, Huntington Ingalls Industries, Inc. ("HII", the "Company", "we", "us", or "our" and, as the context requires, including our predecessor business as a subsidiary of Northrop Grumman Corporation ("Northrop Grumman")) has been designing, building, overhauling, and repairing ships primarily for the U.S. Navy and the U.S. Coast Guard. We are the nation's sole designer, builder, and refueler of nuclear-powered aircraft carriers, a builder of amphibious assault and expeditionary warfare ships for the U.S. Navy, the sole builder of National Security Cutters for the U.S. Coast Guard, one of only two companies currently designing and building nuclear-powered submarines for the U.S. Navy and one of only two companies that builds the Navy's current fleet of DDG-51 Arleigh Burke-class destroyers. We are the exclusive provider of Refueling and Complex Overhaul services for nuclear-powered aircraft carriers, a full-service systems provider for the design, engineering, construction, and life cycle support of major programs for surface ships and a provider of fleet support and maintenance services for the U.S. Navy.

We conduct most of our business with the U.S. Government, principally the Department of Defense ("DoD"). As prime contractor, principal subcontractor, team member or partner, we participate in many high-priority U.S. defense technology programs. We operate our shipbuilding business through our Huntington Ingalls Incorporated subsidiary, which is organized into two segments: Ingalls Shipbuilding ("Ingalls"), which includes our non-nuclear ship design, construction, repair, and maintenance businesses; and Newport News Shipbuilding ("Newport News"), which includes all of our nuclear ship design, construction, overhaul, refueling, and repair and maintenance businesses. We also provide a range of services to the energy and oil and gas industries as well as government customers.

Our two major shipyards are currently located in Pascagoula, Mississippi and Newport News, Virginia. In October 2014, we ceased shipbuilding construction operations at our Avondale, Louisiana shipyard and consolidated those activities into our Pascagoula shipyard. We are exploring the potential for alternative uses of the Avondale facility. For a more detailed discussion of the costs that we expect to incur in connection with the wind down of shipbuilding at Avondale, see Risk Factors in Item 1A.

We became an independent, publicly-owned company on March 31, 2011, when we were spun off from Northrop Grumman. We have owned and operated the legacy Northrop Grumman shipbuilding business since the spin-off. We believe our product capabilities, heavy industrial facilities, and a workforce of approximately 38,000 employees position us well to continue to support the long-term objectives of the U.S. Navy and U.S. Coast Guard.

2. Briefly (250 words or less) discuss one fact related to either inventory accounting or plant and intangible asset accounting for the company you selected.

HII uses straight line depreciation on their property, plant, and equipment. This is somewhat surprising because many of its building are older and it would make sense that any newer building used an accelerated method so that excess cash due to lower taxes could be leveraged into new materials, manufacturing, or technology. However, the 10K is not a tax record, so it is somewhat understandable that they would use two different methods for depreciation as they are a large enough corporation to support the overhead to do this. Also, based on the fact that they are heavily contract based, they would want to put the best foot forward in regards to income statements for public consumption. ("Huntington Ingalls Industries 10-K", 2017, p. 73)

The remaining assets are depreciated using the straight-line method, with the following lives:

("Huntington Ingalls Industries 10-K", 2017, p. 73)

3. Briefly (250 words or less) discuss one disclosure from the company’s 10-K that you believe has significance to investors and/or creditors who are stakeholders in this company.

Mortality - Mortality assumptions are used to determine the retirement related benefit obligations and expense, and represent the likelihood and duration of benefit payments to plan participants based on historical experience and projected longevity. We periodically update our mortality assumptions as circumstances warrant. If the IRS publishes updated mortality tables for funding purposes, our pension contributions might be affected.("Huntington Ingalls Industries 10-K", 2017, p. 42) As of December 31, 2016 and 2015, our qualified pension plans were funded 83% and 84%, respectively, on a FAS basis. ("Huntington Ingalls Industries 10-K", 2017, p. 56)

This has some impacts on various levels. First, they are still funding pensions. This liability could have an impact on future cash flow and net revenue. Second, if they are using outdated (or what they consider to be) mortality tables for funding purposes, they could be over/under-funding a significant amount of liability. This adds a level of variability and concern for an investor and stockholder. Having so many employees/ex-employees, this could have a significant impact on financial reportings in the future.

2016 - Free cash flow decreased $136 million from 2015, primarily due to capital expenditures, higher funding of retiree benefit plans, a change in trade working capital, and the impact in 2015 of the settlement of the Aon litigation.("Huntington Ingalls Industries 10-K", 2017, p. 55)

References:

Farmer Bros. Co 10-K. (2015, September 14). Retrieved from https://www.sec.gov/Archives/edgar/data/34563/000003456315000047/farm-2015630x10k.htm#s136A16019B555B62857D7D8132336858

Farmer-brothers-c-dividends. (n.d.). Retrieved November 12, 2017, from https://www.investing.com/equities/farmer-brothers-c-dividends

Huntington Ingalls Industries 10-K. (2017, February 19). Retrieved from https://www.sec.gov/Archives/edgar/data/1501585/000150158515000005/hii201410-k.htm