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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, 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
(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: 1,926,414 as of September 30,
2001.
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,
2001 2000
Net sales $49,400 $52,015
Cost of goods sold 16,831 19,712
32,569 32,303
Selling expense 20,359 19,981
General and administrative expenses 2,924 2,864
23,283 22,845
Income from operations 9,286 9,458
Other income:
Dividend income 811 758
Interest income 2,489 2,991
Other, net 140 (129)
3,440 3,620
Income before taxes 12,726 13,078
Income taxes 4,963 5,167
Income before cumulative
effect of accounting change 7,763 7,911
Cumulative effect of
accounting change,
net of income taxes - (310)
Net income $7,763 $7,601
Income per common share:
Before cumulative effect of
accounting change $4.21 $4.30
Cumulative effect of accounting change ($0.17)
Net income per share $4.21 $4.13
*
Weighted average shares outstanding 1,844,961 1,842,301
Dividends declared per share $0.85 $0.80
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, June 30,
2001 2001
ASSETS
Current assets:
Cash and cash equivalents $61,136 $19,362
Short term investments 209,953 243,818
Accounts and notes receivable, net 14,454 15,326
Inventories 36,303 35,780
Income tax receivable 949 2,991
Deferred income taxes 1,092 1,092
Prepaid expenses 287 510
Total current assets 324,174 318,879
Property, plant and equipment, net 38,672 39,094
Notes receivable 2,727 2,727
Other assets 26,863 26,432
Deferred income taxes 3,263 3,263
Total assets $395,699 $390,395
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,954 $5,153
Accrued payroll expenses 5,270 6,421
Other 8,476 6,081
Total current liabilities 15,700 17,655
Accrued postretirement benefits 21,287 20,800
Other long term liabilities 4,892 4,892
26,179 25,692
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 16,806 16,629
Retained earnings 347,625 341,434
Unearned ESOP shares (12,537) (12,941)
Total shareholders' equity 353,820 347,048
Total liabilities and shareholders' equity $395,699 $390,395
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,
2001 2000
Cash flows from operating activities:
Net income $7,763 $7,601
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of accounting changes 310
Depreciation 1,372 1,345
Deferred income taxes 1,763
Loss on sales of assets (33) (24)
ESOP Compensation expense 581 268
Net loss on investments 120
Net unrealized loss on investments
reclassified as trading 2,336
Change in assets and liabilities:
Short term investments 33,745 (15,759)
Accounts and notes receivable 851 1,312
Inventories (523) 639
Income tax receivable 2,042 -
Prepaid expenses and other assets (208) 351
Accounts payable (3,199) 336
Accrued payroll and expenses and other
liabilities 1,244 3,505
Accrued postretirement benefits 487 318
Total adjustments 36,479 4,440
Net cash provided by operating activities $44,242 $3,161
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,
2001 2000
Net cash provided by operating activities: $44,242 $3,161
Cash flows from investing activities:
Purchases of property, plant and equipment (995) (2,184)
Proceeds from sales of property, plant
and equipment 78 34
Notes repaid 21 24
Net cash used in investing activities (896) (2,126)
Cash flows from financing activities:
Dividends paid (1,572) (1,476)
ESOP contributions - (225)
Net cash used in financing activities (1,572) (1,701)
Net increase (decrease) in cash and
cash equivalents 41,774 (666)
Cash and cash equivalents at beginning
of period 19,362 15,504
Cash and cash equivalents at end of period $61,136 $14,838
Supplemental disclosure of
cash flow information:
Income tax payments $40 $53
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 generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q of Regulation S-
X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended September
30, 2001 are not necessarily indicative of the results that may be expected
for the year ended June 30, 2002.
The balance sheet at June 30, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Farmer Bros Co. annual report on Form 10-K
for the year ended June 30, 2001.
Note 2. Investments
The following is a summary of trading investments (in thousands):
Net Gain
September 30, 2001 Cost or Loss Fair Value
Trading Securities
Corporate debt $ 81,546 $ 61 $ 81,607
U.S. Treasury obligations 33,379 472 33,851
U.S. Agency obligations 42,556 270 42,826
Preferred stock 46,918 917 47,835
Other fixed income 3,014 5 3,019
Futures, options and other
derivative investments 1,390 (575) 815
$208,803 $1,150 $209,953
Net Gain
June 30, 2001 Cost or Loss Fair Value
Trading Securities
Corporate debt $ 85,035 $ 80 $ 85,115
U.S. Treasury obligations 71,030 188 71,218
U.S. Agency obligations 31,852 106 31,958
Preferred stock 46,256 (2) 46,254
Other fixed income 8,014 (3) 8,011
Futures, options and other
derivative investments 1,262 - 1,262
$243,449 $369 $243,818
Note 3. Inventories
(In thousands)
September 30, 2001
Processed Unprocessed Total
Coffee $3,509 $ 9,284 $12,793
Allied products 12,879 5,262 18,141
Coffee brewing equipment 1,894 3,475 5,369
$18,282 $18,021 $36,303
June 30, 2001
Processed Unprocessed Total
Coffee $ 4,120 $ 8,752 $12,872
Allied products 13,847 3,980 17,827
Coffee brewing equipment 2,201 2,880 5,081
$20,168 $15,612 $35,780
Note 4. Comprehensive Income
(In thousands)
For the three months
ended September 30,
2001 2000
Net income $7,763 $ 7,601
Unrealized investment gains, net - 2,646
Total comprehensive income $7,763 $10,247
As a result of the Company's adoption of SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", as amended by Statements 137
and 138, the Company transferred all of its investments classified as
"available for sale" at June 30, 2000 into the "trading" category on July 1,
2000, and accordingly has no unrealized investment gains or losses subsequent
to adoption.
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Operating trends discussed in the Form 10-K for fiscal 2001 have continued
into the first quarter of fiscal 2002. Sales continue to show the effect of
the economic slow down as consumers seem to be limiting their spending in
restaurants. Green coffee costs during the first quarter of fiscal 2002 have
decreased 7% since the June 30, 2001 year end and are 44% lower than green
coffee costs during the first quarter of fiscal 2001. The resulting gross
profit comparison is favorable, with gross profit on coffee products
increasing to 66% of sales in the first quarter of fiscal 2002 as compared to
62% of sales in the same quarter of the prior fiscal year.
Net sales for the first quarter of fiscal 2002 decreased 5% to $49,400,000 as
compared to $52,015,000 in the same quarter of fiscal 2001 and 3% as compared
to $50,807,000 in the quarter ended June 30, 2001. Gross profit increased 1%
to $32,569,000 as compared to $32,303,000 in the same quarter of fiscal 2001
and decreased 4% as compared to $34,053,000 in the quarter ended June 30,
2001.
Operating expenses in the first quarter of fiscal 2002, consisting of selling
and general and administrative expenses, increased 2% to $23,283,000 as
compared to $22,845,000 in the same quarter of fiscal 2001. The increase is
primarily attributed to increases in employee benefit expenses, including the
ESOP, medical expenses and insurance costs.
Other income in the first quarter of fiscal 2002 decreased 5% to $3,440,000
from $3,620,000 in the first quarter of fiscal 2001. The decrease in other
income in the most recent quarter is primarily the result of the decrease in
investment returns on securities in the quarter.
Upon adoption of SFAS 133, 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. A declining interest
rate market in the first quarter of fiscal 2001 resulted in realized and
unrealized gains on securities of approximately $100,000 and $3,500,000,
respectively, in that quarter as compared to realized losses and unrealized
gains on securities of approximately $(850,000) and $780,000, respectively,
in the quarter ended September 30, 2001. Interest earned decreased to
$2,489,000 as compared to $2,991,000 in the quarters ended September 30, 2001
and 2000, respectively.
Net income before the cumulative effect of accounting change decreased 2% to
$7,763,000, or $4.21 per share, as compared to $7,911,000 or $4.30 per share
in fiscal 2001.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities-An Amendment of FASB Statement
133." The adoption of Statement Nos. 133 and 138 on July 1, 2001 resulted in
a cumulative effect of an accounting change of $515,000 ($310,000 net of
taxes) being recognized in the Statement of Net Income.
Net income increased 2% to $7,763,000, or $4.21 or share, as compared to
$7,601,000 or $4.13 per share in fiscal 2001.
Quarterly Summary of Results (in thousands of dollars):
9/30/00 12/30/00 3/31/01 6/30/01 9/30/01
Net sales $52,015 $57,795 $54,814 $50,807 $49,400
Gross profit 32,303 38,631 36,413 34,053 32,569
Income from operations 9,458 14,764 11,882 6,011 9,286
Income before cumulative
effect adjustment 7,911 11,807 9,793 6,977 7,763
Net income 7,601 11,807 9,793 6,977 7,763
Income per share before
cumulative effect
adjustment $4.30 $6.40 $5.32 $3.77 $4.21
Net income per share $4.13 $6.40 $5.32 $3.77 $4.21
Market Risk Disclosures
Financial Markets
We are exposed to market value risk arising from changes in interest rates on
our securities portfolio. Our portfolio of investment grade money market
instruments includes discount commercial paper, medium term notes, federal
agency issues and treasury securities. As of September 30, 2001 over 50% of
these funds were invested in instruments with maturities shorter than 90
days. This portfolio's interest rate risk is not hedged and its average
maturity is approximately 160 days. A 100 basis point increase in the
general level of interest rates would result in a change in the market value
of the portfolio of approximately ($2,160,000).
Our portfolio of preferred securities includes investments in derivatives
that provide a natural economic hedge of interest rate risk. 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 stocks. Specifically, we attempt to
manage the risk arising from changes in the general level of interest rates.
We do 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, 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
securities holdings, the yields on U.S. Treasury securities and related
futures and options.
Interest Rate Changes
(In thousands)
Market Value of September 30, 2001 Change in Market
Preferred Futures & Total Value of Total
Stock Options Portfolio Portfolio
- -200 basis points
("b.p.") $54,813 $0 $54,813 $6,106
- -100 b.p. 51,817 8 51,825 3,118
Unchanged 47,835 873 48,707 0
+100 b.p. 43,870 4,650 48,519 (188)
+200 b.p. 40,115 8,181 48,295 (412)
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.
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 September 30, 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 September 30, 2001.
Commodity Risk Disclosure
(In thousands)
Market Value of
Coffee Cost Coffee September 30, 2001 Change in Market Value
Change Inventory Futures & Options Totals Derivatives Inventory
- -10% $11,514 $ 12 $11,526 $ 69 $(1,279)
unchanged 12,793 (57) 12,736 - -
+10% 14,072 (126) 13,946 ( 69) 1,279
At September 30, 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. Changes 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 right of security
holders, including indentures. not applicable.
(11) Statement re computation of per share
earning. 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 9, 2001
Farmer Bros. Co.
(Registrant)
/s/ John E. Simmons
John E. Simmons
Treasurer and
Chief Financial Officer
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