10-Q: Farmer Bros. Reports Q1 Loss Amid Sales Decline, Higher Costs

Farmer Bros. Co. reported a net loss of $4.0 million for Q1 2026, an improvement from the prior year, but faced declining net sales and gross profit due to lower volumes and increased coffee commodity costs.

Summary

• Net sales for the three months ended September 30, 2025, decreased by $3.5 million, or 4.1%, to $81.6 million from $85.1 million in the prior year, primarily due to declining volumes.
• Gross profit decreased by $4.9 million, or 13.1%, to $32.4 million, with gross margin falling to 39.7% from 43.9%, mainly due to increased green coffee commodity costs.
• Operating expenses decreased by $4.5 million, or 11.3%, to $35.6 million, primarily driven by lower compensation-related costs in selling and general and administrative expenses.
• Net loss improved to $4.0 million, or $(0.19) per share, compared to a net loss of $5.0 million, or $(0.24) per share, in the same period last year.
• EBITDA improved to $(0.751) million from $(1.408) million, while Adjusted EBITDA slightly decreased to $1.364 million from $1.417 million.
• Net cash used in operating activities was $5.0 million, a significant decrease from $2.5 million provided by operating activities in the prior year, mainly due to increased inventories and decreased accrued expenses.
• Capital expenditures decreased to $1.9 million from $3.3 million in the prior year period.
• Outstanding borrowings on the Revolver Credit Facility increased to $18.3 million as of September 30, 2025, from $14.3 million at June 30, 2025.
• The company suspended its 401(k) matching program effective August 1, 2024.

Sentiment

Score: 3

Explanation: The financial performance for the quarter is weak, characterized by declining sales and gross profit, worsening operating loss, and negative cash flow from operations. While net loss improved and operating expenses were reduced, the core business metrics indicate ongoing challenges and financial pressure, leading to a low sentiment score.

Positives

• Net loss improved by 19.5% to $4.0 million compared to $5.0 million in the prior year period.
• EBITDA improved by 46.7% to $(0.751) million from $(1.408) million in the prior year.
• Operating expenses decreased by $4.5 million, or 11.3%, indicating effective cost control measures, particularly in compensation-related costs.
• Interest expense decreased by $0.5 million, or 26.1%, due to lower pension-related interest costs.
• Other, net, showed a gain of $0.5 million compared to a $0.3 million loss in the prior year, primarily due to fewer losses on coffee-related derivative instruments.

Negatives

• Net sales decreased by 4.1% to $81.6 million, primarily driven by declining volumes (down 10.9%).
• Gross profit decreased by 13.1% to $32.4 million, and gross margin declined by 4.2 percentage points to 39.7%, mainly due to increased green coffee commodity costs.
• Loss from operations worsened by 12.5% to $(3.181) million.
• Net cash used in operating activities was $(5.007) million, a significant decline from $2.493 million provided in the prior year, indicating a negative operational cash flow trend.
• Adjusted EBITDA slightly decreased by 3.7% to $1.364 million.
• Outstanding borrowings under the Revolver Credit Facility increased by $4.0 million to $18.3 million.

Risks

• Severe weather conditions impacting operations or supply chain.
• Fluctuations in consumer confidence and economic conditions.
• Volatility in pricing cycles and sales volumes.
• Impact of labor market conditions, including availability and cost of labor.
• Increased costs due to inflation.
• Changes in taxes, tariffs, duties, governmental laws, and regulations.
• Economic downturns caused by pandemics, epidemics, or other disease outbreaks.
• Uncertainty regarding the success of the company's turnaround strategy.
• Impact of capital improvement projects on financial performance.
• Adequacy and availability of capital resources to fund existing and planned business operations and capital expenditure requirements.
• Ability to meet financial covenant requirements in the Credit Facility, which could affect liquidity.
• Effectiveness of compensation-based employee incentives in improving performance.
• Capacity to meet the demands of large national account customers.
• Execution of business growth plans and achievement of related financial metrics.
• Success in retaining and attracting qualified employees.
• Ability to adapt to technology and new commerce channels.
• Effect of capital markets and other external factors on stockholder value.
• Fluctuations in the availability and cost of green coffee.
• Intense competition within the coffee and food industry.
• Organizational changes and their impact on operations.
• Effectiveness of hedging strategies in reducing price volatility.
• Changes in consumer preferences.
• Ability to implement sustainability initiatives without materially impairing profitability.
• Increased commodity cost volatility and consumer/economic uncertainty due to rapid changes in global trade policies and tariffs.

Future Outlook

The company anticipates capital expenditures between $9.0 million and $11.0 million for fiscal year 2026, expecting to finance these through cash flows from operations and borrowings under its Credit Facility. Management believes current liquidity and the Credit Facility will be sufficient to fund working capital and capital expenditure requirements for the next 12 months and beyond. The company continues to monitor macroeconomic trends, including product cost inflation, tariffs, and potential changes in global trade policies, which may adversely affect future net sales and profitability.

Management Comments

• Management believes that the Credit Facility, to the extent available, in addition to cash flows from operations, collectively, will be sufficient to fund working capital and capital expenditure requirements for the next 12 months and beyond.
• Management considers it essential to the best interests of the company's shareholders to attract top executives and to foster the continuous employment of key management personnel.

Industry Context

The company operates in the competitive coffee and food service industry, facing challenges from macroeconomic trends such as inflation and commodity price volatility, particularly for green coffee. The decline in sales volumes suggests a struggle to maintain market share or adapt to changing consumer demand, while increased average unit prices indicate efforts to offset rising costs. The suspension of the 401(k) matching program and reduced operating expenses reflect a focus on cost control in a challenging environment. The company's reliance on its DSD network and diverse customer base (from independent restaurants to large institutional buyers) positions it broadly within the industry, but it must navigate intense competition and evolving consumer preferences for sustainably-produced offerings.

Comparison to Industry Standards

• NA

Management Changes

Corporate Governance

Legal Proceedings

• The company is a party to various pending legal and administrative proceedings. Management's opinion is that the outcome of these proceedings will not have a material impact on the company's financial position, results of operations, or cash flows.

Related Party Transactions

• NA

Stakeholder Impact

• Shareholders: Experience a net loss, but an improvement from the prior year. Declining sales and gross profit are concerning, while cost control efforts are positive. The executive severance and bonus agreements are designed to retain key talent, which could benefit long-term shareholder value, but also represent significant potential payouts.
• Employees: The suspension of the 401(k) matching program could negatively impact employee benefits and morale. The severance and bonus agreements are beneficial for the named executives, providing retention incentives.
• Customers: Facing price increases, which may impact customer loyalty or demand, especially given declining sales volumes. The company continues to offer a wide range of products and services.
• Creditors: The company increased its borrowings under the Revolver Credit Facility, but states it is in compliance with all financial covenants and expects to remain so for the next 12 months. The availability of $31.2 million on the facility provides some financial flexibility.

Next Steps

• Continue to monitor macroeconomic trends, including product cost inflation, tariffs, and global trade policies.
• Fund anticipated capital expenditures of $9.0 million to $11.0 million in fiscal 2026 through cash flows from operations and borrowings under the Credit Facility.
• Executives John E. Moore III, Vance Fisher, and Jared Vitemb are eligible for a Transaction Bonus if a Change in Control is consummated by January 1, 2026, or a Special Bonus and PBRSU grant if not.

Key Dates

Recommendation

While Farmer Bros. Co. showed an improved net loss and EBITDA, core operational metrics like net sales and gross profit declined, and cash flow from operations turned significantly negative. The increase in green coffee commodity costs and declining volumes are headwinds. The company's cost control measures are positive, but the overall financial health remains challenged, as evidenced by increased borrowings and the mention of potential future capital raises. The executive compensation agreements are standard for retention but do not fundamentally alter the business outlook. Given the mixed signals and ongoing challenges, a 'hold' recommendation is appropriate, advising investors to monitor the effectiveness of cost controls and any signs of revenue stabilization.

Keywords

Coffee Roaster, Wholesaler, Foodservice, SEC Filing, 10-Q, Financial Results, Net Sales, Gross Profit, Operating Expenses, Net Loss, EBITDA, Adjusted EBITDA, Green Coffee Costs, Liquidity, Capital Expenditures, Severance Agreements, Transaction Bonus, Corporate Governance, Farmer Bros. Co.