SEC Filing - Farmer Brothers

SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 1999 Commission file number 0-1375 FARMER BROS. CO. California 95-0725980 State of Incorporation Federal ID Number 20333 S. Normandie Avenue, Torrance, California 90502 Registrant's Address Zip (310) 787-5200 Registrant's telephone number 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 [X] NO [ ] Number of shares of Common Stock outstanding: 1,870,754 as of September 30, 1999. PAGE 1 OF 11

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Dollars in thousands, except per share data) FARMER BROS. CO. CONSOLIDATED STATEMENTS OF INCOME (Unaudited) For the three months ended September 30, 1999 1998 Net sales $53,068 $54,035 Cost of goods sold 20,298 22,920 32,770 31,115 Selling expense 19,930 19,914 General and administrative expenses 1,991 1,880 21,921 21,794 Income from operations 10,849 9,321 Other income: Dividend income 615 605 Interest income 2,270 2,239 Other, net (254) 400 2,631 3,244 Income before taxes 13,480 12,565 Income taxes 5,392 5,026 Net income $ 8,088 $ 7,539 Earnings per common share $4.32 $3.91 Weighted average shares outstanding 1,870,754 1,926,414 Dividends declared per share $0.75 $0.70 The accompanying notes are an integral part of these financial statements.

FARMER BROS. CO. CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, June 30, 1999 1999 ASSETS Current assets: Cash and cash equivalents $ 2,681 $ 4,403 Short term investments 114,490 122,203 Accounts and notes receivable, net 17,801 18,199 Inventories 34,830 33,675 Income tax receivable - 249 Deferred income taxes 2,391 2,391 Prepaid expenses 754 429 Total current assets 172,947 181,549 Property, plant and equipment, net 33,842 31,543 Notes receivable 3,884 3,884 Long term investments 96,370 81,760 Other assets 21,905 21,382 Deferred income taxes 4,981 4,718 Total assets $333,929 $324,836 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 2,711 $ 4,786 Accrued payroll expenses 4,526 5,388 Other 11,057 5,744 Total current liabilities 18,294 15,918 Accrued postretirement benefits 18,123 17,707 Other long term liabilities 3,500 3,500 21,623 21,207 Commitments and contingencies - - Shareholders' equity: Common stock, $1.00 par value, authorized 3,000,000 shares; issued issued 1,926,414 and outstanding 1,870,754 in 1999 1,871 1,871 Additional paid-in capital 3,164 3,164 Retained earnings 289,874 283,191 Accumulated other comprehensive income (897) (515) Total shareholders' equity 294,012 287,711 Total liabilities and shareholders' equity $333,929 $324,836 The accompanying notes are an integral part of these financial statements.

FARMER BROS. CO. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the three months ended September 30, 1999 1998 Cash flows from operating activities: Net income $ 8,088 $ 7,539 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,423 1,403 Other (37) (23) Net loss (gain) on investments 364 (285) Changes in assets and liabilities: Accounts and notes receivable 359 (51) Inventories (1,155) 999 Income tax receivable 249 420 Prepaid expenses and other assets (866) (455) Accounts payable (2,075) (997) Accrued payroll expenses and other liabilities 4,451 4,315 Accrued postretirement benefits 416 408 Total adjustments 3,129 5,734 Net cash provided by operating activities $ 11,217 $ 13,273 The accompanying notes are an integral part of these financial statements.

FARMER BROS. CO CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) For the three months ended September 30, 1999 1998 Net cash provided by operating activities: $ 11,217 $ 13,273 Cash flows from investing activities: Purchases of property, plant and equipment (3,717) (1,350) Proceeds from sales of property, plant and equipment 52 28 Purchases of investments (98,827) (161,413) Proceeds from sales of investments 90,920 158,745 Notes issued - (54) Notes repaid 39 63 Net cash used in investing activities (11,533) (3,981) Cash flows from financing activities: Dividends paid (1,406) (1,348) Net cash used in financing activities (1,406) (1,348) Net (decrease) increase in cash and cash equivalents (1,722) 7,944 Cash and cash equivalents at beginning of year 4,403 6,800 Cash and cash equivalents at end of year $ 2,681 $ 14,744 Supplemental disclosure of cash flow information: Income tax payments $ 62 $ 54 The accompanying notes are an integral part of these financial statements.

Notes to Consolidated Financial Statements (Unaudited) Note 1. Unaudited Financial Statements The accompanying unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. It is management's opinion that all adjustments of a normal recurring nature necessary for a fair presentation of the financial position of the Company and the results of operations and cash flows for the interim periods have been made. Note 2. Investments The Company hedges interest rate risk in its portfolio of preferred stock. Deferred losses associated with the hedge are $568,000 and $923,000 at September 30 and June 30, 1999, respectively. (In thousands) Gross Gross Unrealized Unrealized Fair September 30, 1999 Cost Loss Gain Value Current Assets Commercial Paper $ 1,931 - - $ 1,931 U.S. Government Obligations 112,620 (72) 11 112,559 $114,551 (73) 11 $114,490 Non-Current Assets U.S. Government Obligations $ 49,931 (734) - $ 49,197 Municipal debt 1,695 (25) - 1,670 Preferred stocks 36,812 (989) 1,587 37,410 Corporate Bonds 5,117 (649) - 4,468 Liquid asset fund and other 3,598 - 27 3,625 $ 97,153 ($2,397) 1,614 $ 96,370 (In thousands) Gross Gross Unrealized Unrealized Fair June 30, 1999 Cost Loss Gain Value Current Assets Commercial Paper $ 11,895 - 27 $ 11,922 U.S. Government Obligations 110,368 (126) 39 110,281 $122,263 (126) 66 $122,203 Non-Current Assets U.S. Government Obligations $ 35,015 (842) - $ 34,173 Municipal debt 1,695 (8) 2,049 1,687 Preferred stocks 37,538 (548) - 39,039 Corporate bonds 5,075 (461) - 4,614 Liquid asset fund and other 2,247 - - 2,247 $ 81,570 (1,859) 2,049 $ 81,760

Note 2. Investments (Continued) The contractual maturities of debt securities classified as current and non- current available for sale are as follows: Fair Value Maturities 09/30/99 06/30/99 (In thousands) Within 1 year $114,490 $122,203 After 1 year through 5 years 50,867 35,860 $165,357 $158,063 Gross realized gains and losses from available for sale securities were $234,000 and $830,000 at September 30, 1999 and 1998, respectively. Note 3. Inventories (In thousands) Processed Unprocessed Total September 30, 1999 Coffee $ 4,081 $ 9,127 $13,208 Allied products 9,515 5,320 14,835 Coffee brewing equipment 1,926 4,861 6,787 $15,522 $19,308 $34,830 June 30, 1999 Coffee $ 3,619 $ 9,314 $ 12,933 Allied products 11,078 3,424 14,502 Coffee brewing equipment 2,258 3,982 6,240 $16,955 $16,720 $ 33,675 Note 4. Comprehensive Income Effective July 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS 130) "Reporting Comprehensive Income". SFAS 130 requires disclosure of total non-stockholder changes in equity in interim periods and additional disclosures of the components of non-stockholder changes in equity on an annual basis. Total non-stockholder changes in equity includes all changes in equity during a period except those resulting from investments by and distributions to shareholders. For the three months (In thousands) ended September 30, 1999 1998 Net income $ 8,088 $ 7,539 Unrealized investment gains (losses), net (382) (905) Total comprehensive income $ 7,706 $ 6,634

Management's Discussion and Analysis of Financial Condition and Results of Operations Operating trends discussed in the Form 10-K for fiscal 1999 have continued through the first quarter of fiscal 2000. Roast coffee prices and sales volume have decreased as compared to the same quarter of the prior fiscal year, but profit margins have improved. Green coffee prices recently spiked sharply upward on weather concerns in Brazilian coffee growing regions. It is too soon to know whether such concerns will be realized. Net sales for the first quarter of fiscal 2000 decreased to $53,068,000 from $54,035,000 in the same quarter of fiscal 1999. Gross profit increased 5% during the first quarter of fiscal 1999 to $32,770,000 or 62% of sales, as compared to $31,115,000 or 58% of sales, in the same quarter of the prior fiscal year as a result of lower green coffee costs. Operating expenses, composed of selling and general and administrative expenses, reached $21,921,000 in the most recent quarter, compared to $21,794,000 in the same quarter of fiscal 1999. Other income decreased 19% to $2,631,000 in the first quarter of fiscal 2000 as compared to $3,244,000 in the same quarter of the prior fiscal year, primarily because of net investment losses in the preferred stock portfolio. Income before taxes increased 7% to $13,480,000 or 25% of sales, in the first quarter of the 2000 fiscal year as compared to $12,565,000 or 23% of sales in the same quarter of fiscal 1999. Net income for the first quarter of fiscal 2000 increased 7% to $8,088,000 or $4.32 per common share, from $7,539,000 or $3.91 per common share, recorded in the first quarter of fiscal 1999. Quarterly Summary of Results (In thousands of dollars) 09/30/98 12/31/98 03/31/99 06/30/99 09/30/99 Net sales 54,035 58,408 55,207 53,921 53,068 Gross profit 31,115 32,095 35,153 33,374 32,770 Operating income 9,321 10,345 12,144 4,960 10,849 Net income 7,539 7,905 9,159 4,262 8,088 (As a percentage of sales) 09/30/98 12/31/98 03/31/99 06/30/99 09/30/99 Net sales 100.00 100.00 100.00 100.00 100.00 Gross profit 57.58 54.95 63.67 61.89 61.75 Operating income 17.25 17.71 22.00 9.20 20.44 Net income 13.95 13.53 16.59 7.90 15.24 (In dollars) 09/30/98 12/31/98 03/31/99 06/30/99 09/30/99 Net income per share 3.91 4.10 4.83 2.29 4.32 Year 2000 Issues There have been no material changes from the fiscal year end.

Market Risk Disclosures Financial Markets Securities are recorded at fair value and unrealized gains or losses have been recorded as a separate component of shareholders' equity. The Company maintains two distinct portfolios of securities, both portfolios are classified as available for sale. The Company's portfolio of investment grade money market instruments includes bankers acceptances, discount commercial paper, federal agency issues and treasury securities. As of September 30, 1999, over 65% of these funds were invested in instruments with maturities shorter than one year. The remaining balance matures during fiscal 2001 and 2002. This portfolio's interest rate risk is unhedged. Its average maturity is approximately 250 days and a 100 basis point move in the Fed Funds Rate is illustrated in the following table. Interest Rate Changes (In thousands) Change in Market Market Value of September 30, 1999 Value of Fixed Fixed Income Investments Income Investments - -100 b.p. $170,511 $1,673 unchanged $168,838 - +100 b.p. $167,165 ($1,673) The Company is exposed to market value risk arising from changes in interest rates on its portfolio of preferred securities. The Company reviews the interest rate sensitivity of these securities and (a) enters into "short positions" in futures contracts on U.S. Treasury securities or (b) holds put options on such futures contracts in order to reduce the impact of certain interest rate changes on such preferred stocks. Specifically, the Company attempts to manage the risk arising from changes in the general level of interest rates. The Company does not transact in futures contracts or put options for speculative purposes. The following table demonstrates the impact of varying interest rate changes based on the preferred stock holdings, futures and options positions, and market yield and price relationships at September 30, 1999. This table is predicated on an instantaneous change in the general level of interest rates and assumes predictable relationships between the prices of preferred securities holdings, the yields on U.S. Treasury securities, and related futures and options. Interest Rate Changes (In thousands) Market Value of September 30, 1999 Change in Market Preferred Futures and Total Value of Total Securities Options Portfolio Portfolio - -200 basis points $48,400.2 $ 0.0 $48,400.2 $ 4,858.1 ("b.p.") - -100 b.p. 45,432.0 36.8 45,468.8 1,926.7 Unchanged 42,005.6 1,536.5 43,542.1 - +100 b.p. 38,614.2 4,736.4 43,350.6 (191.5) +200 b.p. 35,498.1 8,034.0 43,532.1 (10.0)

Market Risk Disclosures, (Continued) 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 security held, the slope of the Treasury yield curve, the expected volatility of Treasury yields, and the costs of using futures and/or options. At September 30, 1999 and 1998 the hedge consisted entirely of put options on the U.S. Treasury Bond futures contract. Commodity Price Changes The Company is exposed to commodity price risk arising from changes in the market price of green coffee. Registrant prices its inventory on the LIFO basis. In the normal course of business, the Company enters into commodity purchase agreements with suppliers, and futures contracts to hedge exposure to inventory price fluctuations. The Company does not transact in futures contracts or put options for speculative purposes. The following table demonstrates the impact of changes in the price of green coffee on inventory and hedge instruments at September 30, 1999. It assumes an immediate change in the price of green coffee, and the demonstrable relationship between the price of green coffee and the valuations of coffee index futures and put options and relevant commodity purchase agreements at September 30, 1999. Commodity Risk Disclosure (In thousands) Market Value of September 30,1999 Change in Coffee Cost Coffee Futures Market Change Inventory & Options Total Value - - 10% $13,208,000 ($1,000) $13,207,000 $173,000 unchanged $13,208,000 ($174,000) $13,034,000 - + 10% $13,208,000 ($347,000) $12,861,000 ($123,000) At September 30, 1999 the hedge consisted mainly of commodity futures with maturities shorter than three months. PART II OTHER INFORMATION Item 1. Legal proceedings. not applicable. Item 2. Changes in securities. none. Item 3. Defaults upon senior securities. none. Item 4. Submission of matters to a vote of none. security holders. Item 5. Other information. none.

PART II OTHER INFORMATION (Continued) Item 6. Exhibits and reports on Form 8-K. (a) Exhibits. (2) Plan of acquisition, reorganization, arrangement, liquidation or succession. not applicable. (4) Instruments defining the rights of security holders, including indentures. not applicable. (11) Statement re computation of per share earnings. not applicable. (15) Letter re unaudited interim financial information. not applicable. (18) Letter re change in accounting principles. not applicable. (19) Report furnished to security holders not applicable. (22) Published report regarding matters submitted to vote of security holders. not applicable. (23) Consents of experts and counsel. not applicable. (24) Power of attorney. not applicable. (27) Financial Data Schedule See attached Form EX-27. (99) Additional exhibits. not applicable. 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. Date: November 15, 1999 FARMER BROS. CO. (Registrant) John E. Simmons John E. Simmons Treasurer and Chief Financial Officer

5 1000 3-MOS JUN-30-2000 SEP-30-1999 2681 114490 17801 470 34830 172947 33842 59421 333929 18294 0 0 0 1871 292141 333929 53068 53068 20298 21921 0 0 0 13480 5392 8088 0 0 0 8088 0.75 0.75