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SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2001
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: 1,926,414 as of March 31,
2001.
PAGE 1 OF 11
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,
2001 2000 2001 2000
Net sales $ 54,814 $ 56,354 $164,624 $165,725
Cost of goods sold 18,401 18,124 57,277 61,822
36,413 38,230 107,347 103,903
Selling expense 21,310 21,053 62,544 61,213
General and administrative
expenses 3,221 3,264 8,699 7,469
24,531 24,317 71,243 68,682
Income from operations 11,882 13,913 36,104 35,221
Other income:
Dividend income 770 719 2,274 1,988
Interest income 3,204 2,604 9,404 7,258
Other, net 331 253 997 362
4,305 3,576 12,675 9,608
Income before taxes 16,187 17,489 48,779 44,829
Income taxes 6,394 7,125 19,268 18,061
Income before cumulative
effect of accounting change 9,793 10,364 29,511 26,768
Cumulative effect of
accounting change,
net of income taxes - - (310) -
Net income $ 9,793 $ 10,364 $ 29,201 $ 26,768
Income per common share:
Before cumulative effect
of accounting change $5.32 $5.60 $16.02 $14.37
Cumulative effect of
accounting change - - (.17) -
Net income per share $5.32 $5.60 $15.85 $14.37
Weighted average shares
outstanding 1,843,497 1,848,350 1,842,868 1,863,035
Dividends declared per
common share $0.80 $0.75 $2.40 $2.25
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, June 30,
2001 2000
Current assets:
Cash and cash equivalents $ 5,930 $ 15,504
Short term investments 249,687 114,346
Accounts and notes receivable, net 16,678 18,494
Inventories 35,606 36,770
Income tax receivable 1,340 1,340
Deferred income taxes 1,224 1,224
Prepaid expenses 842 882
Total current assets 311,307 188,560
Property, plant and equipment, net 38,826 38,741
Notes receivable 3,161 3,081
Long term investments - 94,243
Other assets 25,880 23,975
Deferred income taxes 3,104 4,867
Total assets $382,278 $353,467
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,602 $ 5,921
Accrued payroll expenses 4,611 5,953
Other 5,495 5,092
Total current liabilities 16,708 16,966
Accrued postretirement benefits 20,356 19,198
Other long term liabilities 4,190 4,190
24,546 23,388
Commitments and contingencies - -
Shareholders' equity:
Common stock, $1.00 par value, authorized
3,000,000 shares; 1,926,414 shares
issued and outstanding 1,926 1,926
Additional paid-in capital 16,491 16,359
Retained earnings 335,933 311,153
Unearned ESOP shares (13,326) (13,679)
Accumulated other comprehensive income - (2,646)
Total shareholders' equity 341,024 313,113
Total liabilities and shareholders'
equity $382,278 $353,467
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,
2001 2000
Cash flows from operating activities:
Net income $ 29,201 $ 26,768
Adjustments to reconcile net income to
net cash (used in) provided by operating activities:
Cumulative effect of accounting change 310 -
Depreciation 4,092 4,240
Deferred income taxes 1,763 -
(Gain) loss on sales of assets (99) 678
ESOP contribution expense 875 -
Net loss on investments 645 450
Net unrealized loss on investments
reclassified as trading 2,337 -
Change in assets and liabilities:
Investments classified as trading (41,743) -
Accounts and notes receivable 1,534 (393)
Inventories 1,164 (1,505)
Income tax receivable - 249
Prepaid expenses and other assets (1,906) (1,794)
Accounts payable 681 1,869
Accrued payroll and expenses and other
liabilities (939) 1,967
Other long term liabilities 1,158 1,132
Total adjustments (30,128) 6,893
Net cash (used in) provided by operating
activities ($927) $33,661
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,
2001 2000
Net cash (used in) provided by operating
activities: ($927) $ 33,661
Cash flows from investing activities:
Purchases of property, plant and equipment (4,205) (11,138)
Proceeds from sales of property, plant
and equipment 167 700
Purchases of investments - (224,639)
Proceeds from sales of investments - 224,037
Notes issued (78) -
Notes repaid 280 101
Net cash used in investing activities (3,836) (10,939)
Cash flows from financing activities:
Dividends paid (4,421) (4,197)
Purchase of common stock - (3,962)
ESOP loan (390) -
Net cash (used in) financing activities (4,811) (8,159)
Net (decrease) increase in cash and
cash equivalents (9,574) 14,563
Cash and cash equivalents at
beginning of period 15,504 4,403
Cash and cash equivalents at end of period $ 5,930 $ 18,966
Supplemental disclosure of cash flow information:
Income tax payments $18,459 $ 15,085
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 accounting principles generally
accepted in the United States for complete financial statements. It is our
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.
The results of operations in the nine month period ended March 31, 2001 are
not necessarily indicative of the results that may be expected in the
fiscal year ending June 30, 2001.
Note 2. Summary Significant Accounting Policies
Derivatives
In June 1998 the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended
by Statements 137 and 138. The Statement requires the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are
not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the
fair value of derivatives are either offset against the change in fair
value of assets, liabilities, or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change
in fair value is immediately recognized in earnings. The adoption of
Statement No. 133, as amended, on July 1, 2000, resulted in a cumulative
effect of an accounting change of $515,000 being recognized in the
Statement of Net Income, net of taxes, and a corresponding credit in other
comprehensive income.
The Company purchases various derivative instruments as investments or to
create natural economic hedges of its interest rate risk and commodity
price risk. At March 31, 2001 derivative instruments are not designated as
accounting hedges as defined by Statement 133. The fair value of
derivative instruments is based upon broker quotes.
Investments, consisting of marketable debt and equity securities and money
market instruments, are held for trading purposes and are stated at fair
value. Gains and losses, both realized and unrealized, are included in
other income and expense.
Note 3 Investments
On July 1, 2000 the Company transferred all of its investments classified
as "available for sale" at June 30, 2000 into the "trading" category.
Accordingly, the Company recognized the accumulated unrealized loss of
$3,894,000 in the consolidated statement of net income for the period ended
September 30, 2000 as other income and a corresponding amount in other
comprehensive income for the period ended September 30, 2000.
The following is a summary of trading investments at March 31, 2001.
(In thousands) Fair Value
Corporate debt $100,021
U.S. Treasury obligations 37,307
U.S. Agency obligations 57,683
Preferred stock 45,653
Other fixed income 8,010
Futures, options and other and derivative investments 1,013
$249,687
Net unrealized holding gains on trading securities included in earnings is
$402,000 at March 31, 2001.
Note 4. Inventories
(In thousands) Processed Unprocessed Total
March 31, 2001
Coffee $ 3,917 $ 9,334 $13,251
Allied products 12,305 4,380 16,685
Coffee brewing equipment 1,865 3,805 5,670
$18,087 $17,519 $35,606
June 30, 2000
Coffee $ 4,007 $ 9,239 $13,246
Allied products 11,922 5,210 17,132
Coffee brewing equipment 2,034 4,358 6,392
$17,963 $18,807 $36,770
Interim LIFO Calculations
An actual valuation of inventory under the LIFO method can be made only at
the end of each year based on the inventory levels and costs at that time.
Accordingly, interim LIFO calculations must necessarily be based on
management's estimates of expected year-end inventory levels and costs.
Because these are subject to many forces beyond management's control,
interim results are subject to the final year-end LIFO inventory valuation.
Note 5. Employee Stock Ownership Plan
During the three month and nine month periods ended March 31, 2001 the
Company charged $281,000 and $815,000, respectively, to compensation
expense related to the ESOP. The difference between cost and fair market
value of committed to be released shares is recorded as additional paid-in
capital.
The ESOP shares as of March 31, 2001 are as follows:
Allocated shares 5,858
Committed to be released shares 1,481
Unallocated shares 81,436
Total ESOP shares 88,775
Note 6. Comprehensive Income
(In thousands) For the three months For the nine months
ended March 31, ended March 31,
2001 2000 2001 2000
Net income $ 9,793 $10,364 $29,201 $26,768
Unrealized investment
gains (losses), net - (445) 2,646 (1,837)
Total comprehensive
income $ 9,793 $ 9,919 $31,847 $24,931
Item 2. Management's Discussion and Analysis
Financial Condition
There have been no material changes in the Company's financial condition
since the year ended June 30, 2000. On July 1, 2000 the Company transferred
all of its investments classified as "available for sale" at June 30, 2000
into the "trading" category. As a result there is in an increase in
current assets and working capital which now include assets previously
classified as "non-current".
March 31, June 30,
2001 2000
Current assets $311,307 $188,560
Current liabilities 16,708 16,966
Working capital 294,599 171,594
Quick ratio 16.30:1 8.74:1
Total assets $382,278 $353,467
Results of Operations
Net sales for the third quarter of fiscal 2001 decreased 2.7% to
$54,814,000 as compared to $56,354,000 in the same quarter of fiscal 2000
and 0.7% as compared to $55,207,000 in the same quarter of fiscal 1999.
Net sales for the nine months of fiscal 2001 declined 0.7% to $164,624,000
as compared to $165,725,000 in the same period of the prior fiscal year.
Although sales of allied products have grown, continued decreases in the
sales volume of roast coffee result in an overall decrease in sales.
Volatility in the green coffee market and a general decline in the cost of
green coffee in the current fiscal year has allowed us to maintain strong
profit margins on coffee products. Gross profit in the most recent quarter
decreased 4.7% to $36,413,000 as compared to $38,230,000 in the same
quarter of fiscal 2000 and increased 3.5% as compared to $35,153,000 in the
same quarter of fiscal 1999. Gross profit for fiscal 2001 to date
increased 3.3% to $107,347,000, or 65.2% of sales, as compared to
$103,903,000, or 62.7% of sales, in the same period of fiscal 2000.
Operating expenses, consisting of selling and general and administrative
expenses, increased 0.9% to $24,531,000 in the third quarter of fiscal
2001, as compared to $24,317,000 in the same quarter of fiscal 2000, and
increased 6.6% as compared to $23,009,000 in the same quarter of fiscal
1999. Operating expenses for the first nine months of the current fiscal
year increased 3.7% to $71,243,000 from $68,682,000 in the same period of
the 1999 fiscal year, and 7.0% as compared to $66,553,000 in the same
period of fiscal 1999. The increases are primarily compensation related,
with higher product delivery costs (including the cost of gasoline and
diesel) and increased coffee brewing equipment expenses.
Other income for the quarter ended March 31, 2001 increased 20.4% to
$4,305,000 as compared to $3,576,000 in the same quarter of the prior
fiscal year, and increased 31.9% to $12,675,000 in the first three quarters
of fiscal 2001 as compared to $9,608,000 in the same period of the prior
fiscal year. Higher interest rates during the first two quarters of the
current fiscal year resulted in favorable comparisons with the prior year.
On July 1, 2000 we adopted the Financial Accounting Standards Board (FASB)
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by Statements 137 and 138. The statement requires
the Company to recognize all derivatives on the balance sheet at fair
value. Derivatives that are not designated as hedges must be adjusted to
fair value through income. If the derivative is a hedge, depending on the
nature of the hedge, changes in the fair value of derivatives are either
offset against the change in fair value of assets, liabilities or firm
commitments through earnings or recognized in other comprehensive income
until the hedged item is recognized in earnings. The ineffective portion
of a derivative's change in fair value will be immediately recognized in
earnings. The adoption of Statement No. 133 and 138 on July 1, 2000
resulted in $3,894,000 recognized in "Other expense," and $515,000
recognized as the "Cumulative effect of accounting change", adjusted for
income taxes. The after tax cumulative effect adjustment of $310,000
represents approximately $0.17 per share.
Net income for the third quarter of fiscal 2001 reached $9,793,000, or
$5.32 per share, as compared to $10,364,000, or $5.60 per share, in the
third quarter of fiscal 2000 and $9,159,000, or $4.83 per share, in the
same quarter of fiscal 1999. Net income for the first nine months of
fiscal 2001 increased 9.1% to $29,201,000, or $15.85 per share, as compared
to $26,768,000 or $14.37 per share in fiscal 2000.
Quarterly Summary of Results
(In thousands of dollars)
03/31/00 06/30/00 09/30/00 12/31/00 03/31/01
Net sales 56,354 52,963 52,015 57,795 54,814
Gross profit 38,230 37,816 32,303 38,631 36,413
Operating income 13,913 13,744 9,458 14,764 11,882
Net income 10,364 10,808 7,601 11,807 9,793
As a percentage of sales
03/31/00 06/30/00 09/30/00 12/31/00 03/31/01
Net sales 100.00 100.00 100.00 100.00 100.00
Gross profit 67.84 71.40 62.10 66.84 66.43
Operating income 24.69 25.95 18.18 25.55 21.68
Net income 18.39 20.41 14.61 20.43 17.87
In dollars
03/31/00 06/30/00 09/30/00 12/31/00 03/31/01
Net income per
share 5.60 5.85 4.13 6.40 5.32
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Financial Markets
Our portfolio of investment grade money market instruments includes bankers
acceptances, discount commercial paper, medium term notes and federal
agency and treasury securities. As of March 31, 2001, over 75% of these
funds were invested in instruments with maturities shorter than one hundred
eighty days. The portfolio's interest rate risk is not hedged. Its
average maturity is approximately 130 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, 2001 Value of Fixed
Fixed Income Investments Income Investments
- -100 b.p. $205,053 $2,032
unchanged 203,021 -
+100 b.p. 200,989 (2,032)
We are exposed to market value risk arising from changes in interest rates
on our portfolio of preferred stock. We review the interest rate
sensitivity of these securities and (a) enter into "short positions" in
futures contracts on U.S. Treasury securities or (b) hold put options on
such futures contracts in order to reduce the impact of certain interest
rate changes on such preferred stock. Specifically, we attempt to manage
the risk arising from changes in the general level of interest rates.
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, 2001.
This table is predicated on an instantaneous change in the general level of
interest rates and assumes predictable relationships between the prices of
preferred stock holdings, the yields on U.S. Treasury securities, and
related futures and options.
Interest Rate Changes
(In thousands)
Market Value of March 31, 2001 Change in Market
Preferred Futures & Total Value of Total
Stock Options Portfolio Portfolio
- -200 Basis points $52,253.8 $0.0 $52,253.8 $5,645.1
("b.p.")
- -100 b.p. 49,373.1 16.5 49,389.6 2,780.9
Unchanged 45,653.0 955.7 46,608.7 -
+100 b.p. 41,800.2 4,622.3 46,422.5 (186.2)
+200 b.p. 38,187.9 8,087.3 46,275.2 (333.5)
The number and type of future and option contracts entered into depends on,
among other items, the specific maturity and issuer redemption provisions
for each preferred stock 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, 2001 and 2000 the derivatives consisted
entirely of put options on a U.S. Treasury Bond futures contract.
Commodity Price Changes
We are exposed to commodity price risk arising from changes in the market
price of green coffee. We price our inventory on the LIFO basis. In the
normal course of business, we enter into commodity purchase agreements with
suppliers and we purchase green coffee contracts.
The following table demonstrates the impact of changes in the price of
green coffee on inventory and green coffee contracts at March 31, 2001. It
assumes an immediate change in the price of green coffee, and the
valuations of coffee index futures and put options and relevant commodity
purchase agreements at March 31, 2001.
Commodity Risk Disclosure
(In thousands)
Market Value of
Coffee Cost Coffee March 31, 2001 Change in Market Value
Change Inventory Futures & Options Totals Derivatives Inventory
- -10% $11,926 $102 $12,028 $45 ($1,325)
unchanged 13,251 57 13,308 - -
+10% 14,576 12 14,588 (45) 1,325
At March 31, 2001 the derivatives consisted mainly 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. 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: May 10, 2001 FARMER BROS. CO.
/s/ John E. Simmons
Treasurer and
Chief Financial Officer