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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 December 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
(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 December 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 STATEMENTS OF INCOME
(Unaudited)
For the three months For the six months
ended December 31, ended December 31,
2001 2000 2001 2000
Net sales $54,755 $57,795 $104,155 $109,810
Cost of goods sold 17,418 19,164 34,249 38,876
37,337 38,631 69,906 70,934
Selling expense 22,064 21,253 42,423 41,234
General and administrative
expenses 3,382 2,614 6,306 5,478
25,446 23,867 48,729 46,712
Income from operations 11,891 14,764 21,177 24,222
Other income:
Dividend income 793 746 1,604 1,504
Interest income 1,922 3,209 4,411 6,200
Other, net 1,350 795 1,490 666
4,065 4,750 7,505 8,370
Income before taxes 15,956 19,514 28,682 32,592
Income taxes 6,223 7,707 11,186 12,874
Income before cumulative
effect of accounting change 9,733 11,807 17,496 19,718
Cumulative effect of
accounting change,
net of income taxes - - - (310)
Net income $9,733 $11,807 $17,496 $19,408
Income per common share:
Before cumulative effect
of accounting change $5.27 $6.40 $9.47 $10.70
Cumulative effect of
accounting change - - - (0.17)
Net income per share $5.27 $6.40 $9.47 $10.53
Weighted average shares
outstanding 1,847,445 1,842,807 1,847,348 1,842,554
Dividends declared
per share $0.85 $0.80 $1.70 $1.60
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
December 31, June 30,
2001 2000
ASSETS
Current assets:
Cash and cash equivalents $64,700 $19,362
Short term investments 214,379 243,818
Accounts and notes receivable, net 15,778 15,326
Inventories 36,537 35,780
Income tax receivable - 2,991
Deferred income taxes 1,092 1,092
Prepaid expenses 783 510
Total current assets 333,269 318,879
Property, plant and equipment, net 38,582 39,094
Notes receivable 285 2,727
Other assets 27,217 26,432
Deferred income taxes 3,263 3,263
Total assets $402,616 $390,395
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,636 $5,153
Accrued payroll expenses 6,336 6,421
Other 6,136 6,081
Total current liabilities 14,108 17,655
Accrued postretirement benefits 21,772 20,800
Other long term liabilities 4,892 4,892
26,664 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 16,960 16,629
Retained earnings 355,793 341,434
Unearned ESOP shares (12,835) (12,941)
Total shareholders' equity 361,844 347,048
Total liabilities and shareholders' equity $402,616 $390,395
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the six months
Ended December 31,
2001 2000
Cash flows from operating activities:
Net income $17,496 $19,408
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of accounting change - 310
Depreciation 2,759 2,717
Deferred income taxes - 1,763
Gain on sales of assets (100) (19)
ESOP compensation expense 1,138 549
Net loss (gain) on investments 1,154 (462)
Net unrealized loss on investments
reclassified as trading - 2,336
Change in assets and liabilities:
Short term investments 28,285 (15,030)
Accounts and notes receivable (508) (1,352)
Inventories (757) 811
Income tax receivable 2,991 -
Prepaid expenses and other assets (1,058) (897)
Accounts payable (3,517) 350
Accrued payroll expenses and other
Current liabilities (30) 2,520
Accrued post retirement benefits 972 736
Total adjustments 31,329 (5,668)
Net cash provided by
operating activities $48,825 $13,740
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
(Unaudited)
For the six months
Ended December 31,
2001 2000
Net cash provided by
operating activities: $48,825 $13,740
Cash flows from investing activities:
Purchases of property, plant (2,301) (3,517)
and equipment
Proceeds from sales of property,
plant and equipment 154 79
Notes issued (35) (78)
Notes repaid 2,533 36
Net cash provided by (used in) 351 (3,480)
investing activities
Cash flows from financing activities:
Dividends paid (3,137) (2,947)
ESOP contributions (701) (390)
Net cash used in financing activities (3,838) (3,337)
Net increase in cash and
cash equivalents 45,338 6,923
Cash and cash equivalents at beginning
of period 19,362 15,504
Cash and cash equivalents at end of period $64,700 $22,427
Supplemental disclosure of
cash flow information:
Income tax payments $7,732 $10,257
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 accounting principles generally accepted in the United States
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 accounting principles generally accepted in the United
States 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 six month
period ended December 31, 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 accounting principles generally accepted in the United
States 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
December 31, 2001 Cost or Loss Fair Value
Corporate debt $ 75,532 $ 53 $ 75,585
U.S. Treasury obligations 45,843 395 46,238
U.S. Agency obligations 36,051 81 36,132
Preferred stock 45,706 1,164 46,870
Other fixed income 8,250 (18) 8,232
Futures, options and other
derivative investments 1,681 (359) 1,322
$213,063 $1,316 $214,379
Net Gain
June 30, 2001 Cost or Loss Fair Value
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)
December 31, 2001
Processed Unprocessed Total
Coffee $ 3,842 $10,241 $14,083
Allied products 12,123 5,109 17,232
Coffee brewing equipment 1,998 3,224 5,222
$17,963 $18,574 $36,537
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 For the six months
ended December 31, ended December 31,
2001 2000 2001 2000
Net income $9,733 $11,807 $17,496 $19,408
Unrealized investment
gains, net - - - 2,646
Total comprehensive income $9,733 $11,807 $17,496 $22,054
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Net sales for the second quarter of fiscal 2002 increased 10.8% to $54,755,000
as compared to $49,400,000 in the first quarter of fiscal 2002 as the public
began to return to restaurants after the September 11 disaster, but decreased
5.3% as compared to $57,795,000 in the second quarter of fiscal 2001 primarily
due to a 6% decrease in roast coffee sales in the current quarter as compared
to the same quarter of fiscal 2001. Although the average cost of green coffee
has declined 36% in the 12 months ended December 31, 2001, gross profit has
not similarly improved because of the reduced sales volume. Gross profit
decreased 3% to $37,337,000 as compared to $38,631,000 in the same quarter of
fiscal 2001 and increased 15% as compared to $32,569,000 in the first quarter
of fiscal 2002. Gross profit for the first half of fiscal 2001 decreased 1%
to $69,906,000 as compared to $70,934,000 in the same period of the prior
fiscal year.
Operating expenses, consisting of selling and general and administrative
expenses, increased 7% to $25,446,000 in the second quarter of fiscal 2002 as
compared to $23,867,000 in the second quarter of fiscal 2001, and increased 4%
to $48,729,000 in the first half of fiscal 2002 as compared to $46,712,000 in
the first six months of fiscal 2001. This increase is primarily attributed to
compensation related expenses, including salary increases, the cost of the
ESOP, increases in employee medical claims, and employee retirement plan
costs.
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 December 31, 2000 as other income.
During the first half of fiscal 2001, the Company had realized and unrealized
gains (losses) on securities of approximately $709,000 and $(247,000),
respectively, as compared to realized gains on securities of approximately
$207,000 and $947,000, respectively, in the same period of fiscal 2002. Lower
interest rates in the current fiscal year have resulted in a lesser amount of
interest earned. Interest earned decreased 40% to $1,922,000 as compared to
$3,209,000 in the quarter ended December 31, 2001 and 2000, respectively, and
decreased 29% to $4,411,000 as compared to $6,200,000 for the first six months
of fiscal 2002 and 2001, respectively.
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 for the second quarter of fiscal 2002 decreased 18% to $9,733,000,
or $5.27 per share, as compared to $11,807,000, or $6.40 per share, in the
second quarter of fiscal 2001, but decreased 11% to $17,496,000, or $9.47 per
share, as compared to $19,408,000, or $10.53 per share in the first six months
of fiscal 2002 and 2001, respectively.
Quarterly Summary of Results
(In thousands of dollars)
12/30/00 3/31/01 6/30/01 9/30/01 12/31/01
Net sales $57,795 $54,814 $50,807 $49,400 $54,755
Gross profit 38,631 36,413 34,053 32,569 37,337
Income from operations 14,764 11,882 6,011 9,286 11,891
Net income 11,807 9,793 6,977 7,763 9,733
Net income per share $6.40 $5.32 $3.77 $4.21 $5.27
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 December 31, 2001 over 60% 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 140 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 ($2,140,000).
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 December 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
securities holdings, the yields on U.S. Treasury securities and related
futures and options.
Market Value of December 31, 2001
Preferred Futures & Total Value of Total
Stock Options Portfolio Portfolio
- -200 basis points $53,667 $0 $53,667 $5,656
("b.p.")
- -100 b.p. 50,744 37 50,781 2,770
Unchanged 46,870 1,140 48,010 0
+100 b.p. 42,967 4,844 47,811 -199
+200 b.p. 39,296 8,389 47,685 -325
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 December 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 December 31, 2001.
Commodity Risk Disclosure
(In thousands)
Market Value of
Coffee Cost Coffee December 31, 2001 Change in Market Value
Change Inventory Futures & Options Totals Derivatives Inventory
-10% $12,675 $104 $12,779 $285 ($1,408)
unchanged 14,083 (181) 13,902 - -
10% 15,491 (466) 15,025 (285) 1,408
At December 31, 2001 the derivatives consisted mainly of commodity futures and
commodity purchase agreements with maturities shorter than three months.
PART II OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders.
The Annual Meeting of Shareholders of Farmer Bros. Co. was held on November
26, 2001. Holders of the Company's common stock were entitled to one vote per
share of common stock held.
Six directors were elected at the meeting, each to serve for the coming year
and until any successors are elected and qualify. The following persons were
elected as directors: Roy F. Farmer, Roy E. Farmer, John H. Merrell, Lewis A.
Coffman, Guenter W. Berger and John M. Anglin.
The approval of the restatement and amendment of the Company's Articles of
Incorporation was approved by the affirmative vote of 1,587,928 shares in
favor, 121 shares against and 91 shares abstaining.
The proposal to appoint Ernst & Young LLP as the independent accountants for
the Company for the year ended June 30, 2002 was approved with 1,530,919
shares for, 526 shares against and 46,695 shares abstaining.
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: January 30, 2002 Farmer Bros. Co.
(Registrant)
/s/ John E. Simmons
John E. Simmons
Treasurer and
Chief Financial Officer