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 March 31, 2000 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 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 requirement for the past 90 days. YES [X] NO [ ] Number of shares of Common Stock outstanding: 1,845,904 as of March 31, 2000. PAGE 1 OF 12

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Dollars in thousands, except per share data) FARMER BROS. CO. CONSOLIDATED STATEMENT OF INCOME (Unaudited) For the three months For the nine months ended March 31, ended March 31, 2000 1999 2000 1999 Net sales $ 56,354 $ 55,207 $165,725 $167,650 Cost of goods sold 18,124 20,054 61,822 69,287 38,230 35,153 103,903 98,363 Selling expense 21,053 20,187 61,213 60,567 General and administrative expenses 3,264 2,192 7,469 5,986 24,317 23,009 68,682 66,553 Income from operations 13,913 12,144 35,221 31,810 Other income: Dividend income 719 605 1,988 1,792 Interest income 2,604 2,153 7,258 6,682 Other, net 253 363 362 721 3,576 3,121 9,608 9,195 Income before taxes 17,489 15,265 44,829 41,005 Income taxes 7,125 6,106 18,061 16,402 Net income $ 10,364 $ 9,159 $ 26,768 $ 24,603 Earnings per common share $5.60 $4.83 $14.37 $12.84 Weighted average shares outstanding 1,848,350 1,897,444 1,863,035 1,916,757 Dividends declared per common share $0.75 $0.70 $2.25 $2.10 The accompanying notes are an integral part of these financial statements.

FARMER BROS. CO. CONSOLIDATED BALANCE SHEETS (Unaudited) March 31, June 30, 2000 1999 ASSETS Current assets: Cash and cash equivalents $ 18,966 $ 4,403 Short term investments 67,827 122,203 Accounts and notes receivable, net 18,491 18,199 Inventories 35,180 33,675 Income tax receivable - 249 Deferred income taxes 2,391 2,391 Prepaid expenses 502 429 Total current assets 143,357 181,549 Property, plant and equipment, net 37,120 31,543 Notes receivable 3,884 3,884 Long term investments, net 133,263 81,760 Other assets 23,046 21,382 Deferred income taxes 5,907 4,718 Total assets $346,577 $324,836 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,655 $ 4,786 Accrued payroll expenses 4,465 5,388 Other 8,634 5,744 Total current liabilities 19,754 15,918 Accrued postretirement benefits 18,839 17,707 Other long term liabilities 3,500 3,500 22,339 21,207 Commitments and contingencies - - Shareholders' equity: Common stock, $1.00 par value, authorized 3,000,000 shares; issued 1,926,414 and outstanding 1,845,904 shares at March 31, 2000 and 1,870,754 shares at June 30, 1999 1,846 1,871 Additional paid-in capital 3,121 3,164 Unearned ESOP shares (13,146) - Retained earnings 315,015 283,191 Accumulated other comprehensive loss (2,352) (515) Total shareholders' equity 304,484 287,711 Total liabilities and shareholders' equity $346,577 $324,836 The accompanying notes are an integral part of these financial statements.

FARMER BROS. CO. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) For the nine months ended March 31, 2000 1999 Cash flows from operating activities: Net income $ 26,768 $ 24,603 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 4,240 3,988 Other 678 (89) Net loss (gain) on investments 450 (398) Changes in assets and liabilities: Accounts and notes receivable (393) (2,142) Inventories (1,505) 4,221 Income tax receivable 249 453 Prepaid expenses and other assets (1,794) (2,564) Accounts payable 1,869 1,144 Accrued payroll expenses and other liabilities 1,967 898 Accrued postretirement benefits 1,132 1,322 Total adjustments 6,893 6,833 Net cash provided by operating activities $ 33,661 $ 31,436 The accompanying notes are an integral part of these financial statements.

FARMER BROS. CO. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (Unaudited) For the nine months ended March 31, 2000 1999 Net cash provided by operating activities: $ 33,661 $ 31,436 Cash flows from investing activities: Purchases of property, plant and equipment (11,138) (3,889) Proceeds from sales of property, plant and equipment 700 118 Purchases of investments (224,639) (486,817) Proceeds from sales of investments 224,037 487,556 Notes issued - (54) Notes repaid 101 117 Net cash used in investing activities (10,939) (2,969) Cash flows from financing activities: Dividends paid (4,197) (4,045) Purchase of common stock (3,962) (11,817) Net cash (used in) provided by financing activities (8,159) 15,862 Net increase in cash and cash equivalents 14,563 12,605 Cash and cash equivalents at beginning of period 4,403 6,800 Cash and cash equivalents at end of period $ 18,966 $ 19,405 Supplemental disclosure of cash flow information: Income tax payments $ 15,085 $ 14,991 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 statement of the results of operations for the interim periods have been made. Note 2. Investments The Company hedges interest rate risk in its portfolio of preferred stock. Deferred gains and losses associated with the hedge are ($1,088,000) and $923,000 at March 31, 2000 and June 30, 1999, respectively. Gross Gross (In thousands) Unrealized Unrealized Fair March 30, 2000 Cost Loss Gains Value Current Assets Commercial paper $ 11,271 (4) - $ 11,267 U.S. Government obligations 57,182 (624) 2 56,560 $ 68,453 (628) 2 $ 67,827 Non-Current Assets U.S. Government obligations $ 82,107 (1,466) 2 $ 80,643 Municipal debt 1,695 (50) - 1,669 Preferred stock 43,475 (1,736) 1,387 43,126 Corporate bonds 7,171 (241) - 6,906 Other 2,121 (1,202) - 919 $136,569 $(4,695) $ 1,389 $133,263 Gross Gross (In thousands) Unrealized Unrealized Fair June 30, 1999 Cost Loss Gains 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) - 1,687 Preferred stock 37,538 (548) 2,049 39,039 Corporate bonds 5,075 (461) - 4,614 Other 2,247 - - 2,247 $ 81,570 (1,859) 2,049 $ 81,760

The contractual maturities of debt securities classified as current and non- current available for sale are as follows: Maturities Fair Value (In thousands) 03/31/00 06/30/99 Within 1 year $ 67,827 $122,203 After 1 year through 5 years 87,288 35,860 $155,115 $158,063 Gross realized gains and losses from available for sale securities were $609,000 and ($1,059,000) at March 31, 2000, and $1,881,000 and ($1,483,000) at March 31, 1999, respectively. Note 3. Inventories (In thousands) Processed Unprocessed Total March 31, 2000 Coffee $ 3,965 $ 9,116 $13,081 Allied products 11,722 3,644 15,366 Coffee equipment 1,856 4,877 6,733 $17,543 $17,637 $35,180 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. Employee Stock Ownership Plan On January 1, 2000, the Company established the Farmer Bros. Co. Employee Stock Ownership Plan (ESOP) to provide benefits to all employees. The Board of Directors has authorized a loan of up to $50,000,000 to the ESOP to purchase up to 300,000 shares, secured by the stock purchased. The loan will be repaid from the Company's discretionary plan contributions over a fifteen year term at a variable rate of interest, 7.65% at March 31, 2000. On March 31, 2000 the ESOP had an outstanding loan balance of $13,368,000 and had purchased 81,875 shares of the Company's common stock. Shares purchased with the loan proceeds are held by the plan trustee for allocation among the participants as the loan is repaid. The unencumbered shares are allocated to participants using a compensation-based formula. Subject to vesting requirements, allocated shares are owned by participants, and shares are held by the plan trustee until the participant retires. The Company reports compensation expense equal to the average market price of shares allocated to participants or to be released from collateral during the plan year. The cost of shares purchased by the ESOP which have not been committed to be released or allocated to participants are shown as

a contra-equity account "Unearned ESOP shares" and are excluded from earnings per share calculations. During the fiscal quarter ending March 31, 2000, the Company recorded $223,000 of compensation expense related to the ESOP for the plan year ending December 31, 2000. The ESOP shares as of March 31 are as follows: Allocated shares - Committed to be released shares 1,365 Unallocated shares 80,510 Total ESOP shares 81,875 Fair value of unearned ESOP shares $13,368,000 Note 5. Comprehensive Income The following table presents the Company's comprehensive income for the three and nine month periods ended March 31. For the three months For the nine months ended March 31 ended March 31 (In thousands) 2000 1999 2000 1999 Net income $10,364 $ 9,159 $26,768 $24,603 Unrealized investment gains (losses), net (445) 340 (1,837) (1,301) Total comprehensive income $ 9,919 $ 9,499 $24,931 $23,302 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Net sales for the third quarter of fiscal 2000 increased 2% to $56,354,000 as compared to $55,207,000 in the same quarter of the prior fiscal year, as a result of increased allied product sales. Fiscal 2000 year to date net sales decreased 1% to $165,725,000 from $167,650,000 in the same period of fiscal 1999. This decrease is primarily the result of lower roast coffee sales volume partially offset by increased allied product sales. Lower green coffee costs during the most recent fiscal quarter resulted in an 9% increase in gross profit to $38,230,000 from $35,153,000 in the prior fiscal year, and fiscal year to date gross profit increased 6% to $103,903,000 as compared to $98,363,000 in the first nine months of fiscal 1999. Operating expenses increased 6% to $24,317,000 in the third quarter of fiscal 2000 from $23,009,000 in the same quarter of the prior fiscal year and operating expenses for the first three quarters of fiscal 2000 increased 3% to $68,682,000 from $66,553,000 in the same period of the prior fiscal year. This increase is primarily from increases in employee benefit expenses (payroll, medical costs, ESOP and retirement benefits), offset by lower costs of coffee brewing equipment.

Net income for the third quarter of fiscal 2000 reached $10,364,000, or $5.60 per share, as compared to $9,159,000, or $4.83 per share, in the same quarter of fiscal 1999. Net income for the first three quarters of fiscal 2000 reached $26,768,000, or $14.37 per share, as compared to $24,603,000, or $12.84 per share, in the same period of fiscal 1999. QUARTERLY SUMMARY OF RESULTS (In thousands of dollars) 03/31/99 06/30/99 09/30/99 12/30/99 03/31/00 Net sales 55,207 53,921 53,068 56,303 56,354 Gross profit 35,153 33,374 32,770 32,903 38,230 Operating income 12,144 4,960 10,849 10,459 13,913 Net income 9,159 4,262 8,088 8,316 10,364 (As a percentage of sales) 03/31/99 06/30/99 09/30/99 12/30/99 03/31/00 Net sales 100.00 100.00 100.00 100.00 100.00 Gross profit 63.67 61.89 61.75 58.44 67.84 Operating income 22.00 9.20 20.44 18.58 24.69 Net income 16.59 7.90 15.24 14.77 18.39 (In dollars) 03/31/99 06/30/99 09/30/99 12/30/99 03/31/00 EPS 4.83 2.29 4.32 4.45 5.60 Item 3. Quantitative and Qualitative Disclosures about Market Risk Financial Markets Securities are recorded at fair value and unrealized gains or losses have been recorded as other comprehensive income. 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 March 31, 2000, over 20% of these funds were invested in instruments with maturities shorter than three months, which are included in cash equivalents. The remaining balance matures during fiscal 2001 and 2002. This portfolio's interest rate risk is unhedged. Its average maturity is approximately 287 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 March 31, 2000 Value of Fixed Fixed Income Investments Income Investments - -100 b.p. $165,005 $ 1,634 unchanged $163,371 $ 0 +100 b.p. $161,737 $ (1,634) 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 contract 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 March 31, 2000. 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 at March 31, 2000 Change in Market Preferred Futures and Total Value of Total Securities Options Portfolio Portfolio - -200 basis points $52,098.5 - $52,098.5 $6,662.6 ("b.p.") - -100 b.p. 48,842.6 1.2 48,843.9 3,407.9 Unchanged 45,142.2 293.7 45,435.9 - +100 b.p. 41,434.3 2,855.8 44,290.1 (1,145.8) +200 b.p. 37,977.3 6,114.4 44,091.7 (1,344.2) The number and type of futures and options contracts entered into depends on 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 March 31, 2000 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. The Company 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 inventory and hedge instruments at March 31, 2000. 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 March 31, 2000, and does not take into account fluctuations of inventory levels and futures and options activity. Commodity Risk Disclosure (In thousands) Market Value of Coffee Cost Coffee March 31, 2000 Change in Change Inventory Futures & Options Totals Market Value - -10% $13,081 $ 363 $13,444 $ 546 unchanged 13,081 (183) 12,898 0 +10% 13,081 (729) 12,352 (546) At March 31, 2000 the hedge consisted of commodity futures with maturities shorter than three months. PART II OTHER INFORMATION Item 1. Legal proceedings. not applicable. Item 2. Change in securities. none. Item 3. Defaults upon senior securities. none. Item 4. Submission of matters to a vote of security holders. none. Item 5. Other information. none. 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 identures. not applicable. (11) Statement re computations 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. (b) Reports on Form 8-K. December 21, 1999. 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: May 12, 2000 FARMER BROS. CO. John E. Simmons John E. Simmons Treasurer and Chief Financial Officer

5 1000 3-MOS JUN-30-2000 MAR-31-2000 18966 67827 18491 470 35180 143357 37120 58742 346577 19754 0 0 0 1846 344731 346577 56354 56354 18124 24317 0 0 0 17489 7125 10364 0 0 0 10364 5.60 5.60