View:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
Commission file number: 0-1375
FARMER BROS. CO.
California 95-0725980
State of Incorporation IRS Employer Identification Number
20333 S. Normandie Avenue, Torrance, California 90502
Registrant's address
(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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [X] NO [ ]
Number of shares of Common Stock, $1.00 par value, outstanding as of August
1, 2003: 1,926,414 and the aggregate market value of the common shares
held by non-affiliates of the Registrant was approximately $638 million.
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,
2003 2002
Net sales $45,665 $50,389
Cost of goods sold 16,033 18,857
Gross profit 29,632 31,532
Selling expense 22,317 20,744
General and administrative expense 6,258 3,434
Operating expenses 28,575 24,178
Income from operations 1,057 7,354
Other income:
Dividend income 802 857
Interest income 651 1,287
Other, net 1,572 -379
3,025 1,765
Income before taxes 4,082 9,119
Income taxes 1,571 3,511
Net income $2,511 $5,608
Net income per share $1.41 $3.03
Weighted average shares outstanding 1,782,928 1,851,197
Dividends declared per share $0.95 $0.90
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30 June 30,
2003 2003
ASSETS
Current assets:
Cash and cash equivalents $31,054 $18,986
Restricted cash $975 $975
Short term investments 267,320 274,444
Accounts and notes receivable, net 12,777 13,756
Inventories 34,605 34,702
Income tax receivable 1,338 2,878
Prepaid expenses 634 876
Total current assets 348,703 346,617
Property, plant and equipment, net 41,872 41,753
Notes receivable 193 193
Other assets 25,767 26,390
Deferred income taxes 1,462 1,462
Total assets $417,997 $416,415
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $4,287 $3,321
Accrued payroll expenses 5,751 7,362
Deferred income taxes 976 976
Other 4,651 5,000
Total current liabilities 15,665 16,659
Accrued postretirement benefits 25,177 25,041
Other long term liabilities 5,981 5,570
Total Liabilities 46,823 47,270
Commitments and contingencies - -
Shareholders' equity:
Common stock, $1.00 par value,
authorized 3,000,000 shares; issued
and outstanding 1,926,414 1,926 1,926
Additional paid-in capital 19,149 18,798
Retained earnings 383,643 382,831
Unearned ESOP shares -32,498 -33,364
Less accumulated comprehensive loss -1,046 -1,046
Total shareholders' equity 371,174 369,145
Total liabilities and
shareholders' equity $417,997 $416,415
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,
2003 2002
Cash flows from operating activities:
Net income $2,511 $5,608
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation 1,745 1,376
(Gain)on sales of assets -30 -75
ESOP compensation expense 1,217 799
Net (gain) on investments -1,508 -509
Change in assets and liabilities:
Short term investments 8,632 -1,956
Accounts and notes receivable 969 -2,111
Inventories 97 560
Income tax receivable 1,540 2,553
Prepaid expenses and other assets 865 -1,255
Accounts payable 966 -833
Accrued payroll and expenses and other -1,960 -474
Accrued postretirement benefits 136 460
Other long term liabilities 411 -
Total adjustments 13,080 -1,465
Net cash provided by operating $15,591 $4,143
For the three months
ended September 30,
2003 2002
Net cash provided by
operating activities $15,591 $4,143
Cash flows from investing activities:
Purchases of property, plant and equipment -1,864 -1,151
Proceeds from sales of property, plant
and equipment 30 93
Notes repaid 10 16
Net cash used in investing activities -1,824 -1,042
Cash flows from financing activities:
Dividends paid -1,699 -1,667
ESOP contributions -731
Net cash used in financing activities -1,699 -2,398
Net (decrease) increase in cash and cash 12,068 703
Cash and cash equivalents at beginning of 19,961 7,047
Cash and cash equivalents at end of year $32,029 $7,750
Supplemental disclosure of cash flow information:
Income tax payments 32 20
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 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 three month period ended
September 30, 2003 are not necessarily indicative of the results that may be
expected for the year ended June 30, 2004.
The balance sheet at June 30, 2003 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, 2003.
Note 2. Investments
Investments are as follows (in thousands:
September 30, June 30,
2003 2003
Trading securities at fair value
U.S. Treasury obligations $210,930 $220,057
Preferred stock 55,967 53,897
Futures, options and other
derivative investments 423 490
$267,320 $274,444
Note 3. Inventories
(In thousands)
September 30, 2003
Processed Unprocessed Total
Coffee $ 3,919 $ 9,157 $13,076
Allied products 11,440 4,323 15,763
Coffee brewing equipment 2,180 3,586 5,766
$17,539 $17,066 $34,605
June 30, 2003
Processed Unprocessed Total
Coffee $ 3,853 $ 9,155 $13,008
Allied products 11,776 4,213 15,989
Coffee brewing equipment 2,372 3,333 5,705
$18,001 $16,701 $34,702
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Liquidity and Financial Condition
There have been no material changes in the Company's liquidity or financial
condition since the year ended June 30, 2003.
(in thousands) September 30, June 30,
2003 2003
Current assets $348,703 $348,617
Current liabilities 15,665 $ 16,659
Working capital $333,038 $331,958
Total assets $417,997 $416,415
All present and future liquidity needs are expected to be met by internal
sources. The Company tries not to rely on banks or other third parties for
its working capital and other liquidity needs. There have been no changes in
the needs or commitments described in the Company's Annual Report on Form 10-
K/A.
Results of Operations
All operating trends discussed in the Form 10-K/A for fiscal 2003 have
continued into the first quarter of fiscal 2003. These trends resulted in a 4%
decrease of net sales for the first quarter of fiscal 2004 to $45,655,000 as
compared to $47,784,000 in the fiscal quarter ended June 30, 2003, and 9% as
compared to $50,389,000 in the same quarter of fiscal 2003. In addition, the
company had decreased coffee brewing equipment sales of $2,694,000 in the
current fiscal quarter as compared to the same period of fiscal 2003.
Gross profit decreased 6% to $29,632,000 as compared to $31,532,000 in
the same quarter of fiscal 2003 due to the increased cost of green coffee in
the current quarter. The average cost of green coffee during the first quarter
of fiscal 2004 has increased 1% since the June 30, 2003 year end, but is 23%
higher than the average cost of green coffee for the fiscal quarter ended
September 30, 2002.
Operating expenses in the first quarter of fiscal 2004, consisting of selling
and general and administrative expenses, increased 18% to $28,575,000 as
compared to $24,178,000 in the same quarter of fiscal 2003. The increase is
primarily attributed to increases in employee related expenses and costs
associated with our multi year program to update our information systems.
Payroll expense increased 2%, but employee medical and retirement benefits,
including the ESOP and the cost of post retirement medical expenses, increased
10% or $1,724,000. Computer consulting and training increased $1,968,000 for
the current quarter, as compared to $19,000 in the same quarter of fiscal 2003.
Other income in the first quarter of fiscal 2004 increased 71% to $3,025,000
from $1,765,000 in the first quarter of fiscal 2003. Interest earned decreased
49% to $651,000 as compared to $1,287,000 in the quarter ended September
30, 2002 as the result of trends discussed in the Form 10-K/A for fiscal 2003.
As the result of the above mentioned factors, net income for the first quarter
of fiscal 2004 decreased 55% to $2,511,000 or $1.41 per share, as compared to
$5,608,000, or $3.03 per share, for the first quarter of fiscal 2003.
Quarterly Summary of Results (in thousands of dollars):
9/30/02 12/31/02 3/31/03 6/30/03 9/30/03
Net sales $50,389 $54,118 $49,267 $47,784 $45,665
Gross profit $31,532 $35,154 $32,038 $32,172 $29,632
Income from operations $7,354 $8,319 $4,985 $3,230 $1,057
Net income $5,608 $5,899 $6,339 $5,783 $2,511
Net income per common share $3.03 $3.24 $3.52 $3.23 $1.41
Forward Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q regarding
The risks, circumstances and financial trends that may affect our future
operating results, financial position and cash flows may be forward-looking
statements within the meaning of federal securities laws. These statements
are based on management's current expectations, assumptions, estimates and
observations about our business and are subject to risks and uncertainties.
As a result, actual results could materially differ from the forward looking
statements contained herein. These forward looking statements can be
identified by the use of words like "expects," "plans," "believes,"
"intends," "will," "assumes" and other words of similar meanings. These and
other similar words can be identified by the fact that they do not relate
solely to historical or current facts. While we believe our assumptions are
reasonable, we caution that it is impossible to predict the impact of such
factors which could cause actual results to differ materially from predicted
results. We intend these forward-looking statements to speak only at the
time of this report and do not undertake to update or revise these
projections as more information becomes available. For these statements, we
claim the protection of the safe harbor for forward-looking statements
provided by the Private Securities Litigation Reform Act of 1995.
Item 3. Quantitative and Qualitative Disclosure About Market Risk.
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, 2003 over 62% 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 73 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 $2,120,000.
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, 2003. 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 September 30, 2003 Change in Market
Preferred Futures & Total Value of Total
Stock Options Portfolio Portfolio
- -150 basis points
("b.p.") $61,585 $0 $61,585 $5,308
- -100 b.p. 60,135 5 60,140 3,863
Unchanged 55,967 324 56,277 0
+100 b.p. 50,891 3,221 54,112 (2,165)
+150 b.p. 48,431 5,297 53,728 (2,549)
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, 2003. 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, 2003.
Commodity Risk Disclosure
(In thousands)
Market Value of
Coffee Cost Coffee Futures Change in Market Value
Change Inventory & Options Totals Derivatives Inventory
-10% $12,000 $373 $13,373 $373 ($1,076)
unchanged 13,076 (99) 12,977 - -
10% 14,000 (472) 13,528 (373) 924
At September 30, 2003 the derivatives consisted mainly of commodity futures
with maturities shorter than four months.
Item 4 Controls & Procedures
As of September 30, 2003, with the participation of the Chief Executive Officer
and Chief Financial officer, we evaluated the effectiveness of our disclosure
controls and procedures and and concluded that they were effective as of that
date. No changes occurred during the quarter ended September 30, 2003 that
materially affected, or are reasonably likely to materially affect, our
internal controls over financial reporting, except that during that quarter we
implemented part of our multi-year program to update our information systems
which program includes enhancements to such internal controls.
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. none.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter
Ended September 30, 2003.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
FARMER BROS. CO.
/s/ Roy E. Farmer
Roy E. Farmer, President and Chief Executive Officer and Director
(principal executive officer)
Date: November 13, 2003
/s/ John E. Simmons
John E. Simmons, Treasurer and Chief Financial Officer
(principal financial and accounting officer)
Date: November 13, 2003
Exhibit 31.1
Certification Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
I, Roy E. Farmer, President and Chief Executive Officer of Farmer Bros. Co.
("Registrant"), certifies that:
1. I have reviewed this Quarterly Report on Form 10-Q of Registrant;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the Registrant
and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosured in this report any change in the Registrant's
internal control over financial reporting that occurred
during the Registrant's most recent fiscal quarter (the
Registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely
to materially affect, the Registrant's internal control over
financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
Registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal control over financial reporting.
Date: November 13, 2003
/s/ Roy E. Farmer
Roy E. Farmer
President and Chief Executive Officer
(principal executive officer)
Exhibit 31.2
Certification Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
I, John E. Simmons, Treasurer and Chief Financial Officer of Farmer Bros. Co.
("Registrant"), certifies that:
1. I have reviewed this Quarterly Report on Form 10-Q of Registrant;
2. Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this report;
4. The Registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the Registrant
and have:
(a) Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating
to the Registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period in which this report is being
prepared;
(b) Evaluated the effectiveness of the Registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(c) Disclosured in this report any change in the Registrant's
internal control over financial reporting that occurred
during the Registrant's most recent fiscal quarter (the
Registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely
to materially affect, the Registrant's internal control over
financial reporting; and
5. The Registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over financial
reporting, to the Registrant's auditors and the audit committee of the
Registrant's board of directors (or persons performing the equivalent
functions):
(a) All significant deficiencies and material weaknesses in the
design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the
Registrant's ability to record, process, summarize and report
financial information; and
(b) Any fraud, whether or not material, that involves management
or other employees who have a significant role in the
Registrant's internal control over financial reporting.
Date: November 13, 2003
/s/ John E. Simmons
John E. Simmons
Treasurer and Chief Financial Officer
(principal financial and accounting officer)
Exhibit 32.1 CERTIFICATION of Chief Executive Officer Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 In connection with the annual report of Farmer Bros. Co. (the "Company") on Form 10-Q for the fiscal quarter ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Roy E. Farmer, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. the information contained in the Report fairly represents, in all material respects, the financial condition and results of operation of the Company. Dated: November 13, 2003 /s/ Roy E. Farmer Roy E. Farmer President & Chief Executive Officer (principal executive officer) Exhibit 32.2 CERTIFICATION of Chief Financial Officer Pursuant to Section 906 of The Sarbanes-Oxley Act of 2002 In connection with the annual report of Farmer Bros. Co. (the "Company") on Form 10-Q for the fiscal quarter ended September 30, 2003, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John E. Simmons, Treasurer and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 3. the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 4. the information contained in the Report fairly represents, in all material respects, the financial condition and results of operation of the Company. Dated: November 13, 2003 /s/ John E. Simmons John E. Simmons Treasurer and Chief Financial Officer (principal financial and accounting officer