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, 2002
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 March 31, 2002.
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 nine months
ended March 31, ended March 31,
2002 2001 2002 2001
Net sales $51,298 $54,814 $155,453 $164,624
Cost of goods sold 16,512 18,401 50,761 57,277
34,786 36,413 104,692 107,347
Selling expense 21,753 21,310 64,176 62,544
General and administrative
expenses 3,190 3,221 9,496 8,699
24,943 24,531 73,672 71,243
Income from operations 9,843 11,882 31,020 36,104
Other income:
Dividend income 802 770 2,406 2,274
Interest income 1,540 3,204 5,951 9,404
Other, net (1,683) 331 (193) 997
659 4,305 8,164 12,675
Income before taxes 10,502 16,187 39,184 48,779
Income taxes 4,096 6,394 15,282 19,268
Income before cumulative
effect of accounting cha 6,406 9,793 23,902 29,511
Cumulative effect of
accounting change,
net of income taxes - - - (310)
Net income $6,406 $9,793 $23,902 $29,201
Income per common share:
Before cumulative effect
of accounting change $3.47 $5.32 $12.95 $16.02
Cumulative effect of
accounting change - - - ($0.17)
Net income per share $3.47 $5.32 $12.95 $15.85
Weighted average shares
outstanding 1,846,388 1,843,497 1,845,501 1,842,868
Dividends declared per
Share $0.85 $0.80 $2.55 $2.40
The accompanying notes are an integral part of these financial statements.
FARMER BROS. CO.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, June 30,
2002 2001
ASSETS
Current assets:
Cash and cash equivalents $55,571 $19,362
Short term investments 226,880 243,818
Accounts and notes receivable, net 14,281 15,326
Inventories 36,190 35,780
Income tax receivable 1,783 2,991
Deferred income taxes 1,092 1,092
Prepaid expenses 897 510
Total current assets 336,694 318,879
Property, plant and equipment, net 38,649 39,094
Notes receivable 285 2,727
Other assets 27,402 26,432
Deferred income taxes 3,263 3,263
Total assets $406,293 $390,395
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $2,128 $5,153
Accrued payroll expenses 4,402 6,421
Other 5,578 6,081
Total current liabilities 12,108 17,655
Accrued postretirement benefits 22,243 20,800
Other long term liabilities 4,892 4,892
27,135 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 17,165 16,629
Retained earnings 360,629 341,434
Unearned ESOP shares (12,670) (12,941)
Total shareholders' equity 367,050 347,048
Total liabilities and shareholders' equity $406,293 $390,395
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,
2002 2001
Cash flows from operating activities:
Net income $23,902 $29,201
Adjustments to reconcile net income to
net cash provided by operating activities:
Cumulative effect of accounting change - 310
Depreciation 4,126 4,092
Deferred income taxes - 1,763
Gain on sales of assets (200) (99)
ESOP compensation expense 1,622 875
Net loss (gain) on investments 654 (645)
Net unrealized loss on investments
reclassified as trading - 2,337
Change in assets and liabilities:
Short term investments 16,284 (40,453)
Accounts and notes receivable 897 1,534
Inventories (410) 1,164
Income tax receivable 1,208 -
Prepaid expenses and other assets (1,358) (1,906)
Accounts payable (3,025) 681
Accrued payroll expenses and other
current liabilities (2,522) (939)
Accrued post retirement benefits 1,443 1,158
Total adjustments 18,719 (30,128)
Net cash provided by (used in) operating activities $42,621 ($927)
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,
2002 2001
Net cash provided by operating activities: $42,621 ($927)
Cash flows from investing activities:
Purchases of property, plant and equipment (3,735) (4,205)
Proceeds from sales of property, plant
and equipment 254 167
Notes issued (35) (78)
Notes repaid 2,625 280
Net cash (used in) investing activities (891) (3,836)
Cash flows from financing activities:
Dividends paid (4,706) (4,421)
ESOP contributions (815) (390)
Net cash used in financing activities (5,521) (4,811)
Net increase in cash and
cash equivalents 36,209 (9,574)
Cash and cash equivalents at beginning
of period 19,362 15,504
Cash and cash equivalents at end of period 55,571 5,930
Supplemental disclosure of
cash flow information:
Income tax payments $14,095 $18,459
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 nine month
period ended March 31, 2002 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
March 31, 2002 Cost or Loss Fair Value
Corporate debt $ 39,707 $ 30 $ 39,737
U.S. Treasury obligations 99,030 162 99,192
U.S. Agency obligations 30,000 (103) 29,897
Preferred stock 48,377 (182) 48,195
Other fixed income 8,208 (24) 8,184
Futures, options and other
derivative investments 1,427 248 1,675
$226,749 $ 131 $226,880
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)
March 31, 2002
Processed Unprocessed Total
Coffee $ 3,676 $10,683 $14,359
Allied products 11,790 4,956 16,746
Coffee brewing equipment 2,074 3,011 5,085
$17,540 $18,650 $36,190
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
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 4. Comprehensive Income
(In thousands)
For the three months For the nine months
ended March 31, ended March 31,
2002 2001 2002 2001
Net income $6,406 $9,793 $23,902 $29,201
Unrealized investment
gains, net - - - 2,646
Total comprehensive income $6,406 $9,793 $23,902 $31,847
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, 2001.
March 31, June 30,
2002 2001
Current assets $336,694 $318,879
Current liabilities 12,108 17,655
Working capital $324,586 $311,224
Total assets $406,293 $390,395
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. Our operations are often
affected by the green coffee market. At present the cost of green coffee is
comparatively low; but the market is volatile and green coffee prices could
climb without warning requiring a substantial additional investment in
inventory merely to maintain its existing level of business operations.
The board of directors has authorized financing of an initial loan to the ESOP
of up to $30,000,000 for the purchase of company stock. The company has plans
to purchase improved properties for certain of its branch warehouse locations,
and where buildings are not available, has purchased land and developed the
property itself. At present the company is completing the development of a
branch warehouse in Victorville, CA. The company continues to seek out
friendly acquisitions in its lines of business throughout the country. There
are no acquisitions pending at this time.
Results of Operations
Net sales for the third quarter of fiscal 2002 decreased 6.4% to $51,298,000
as compared to $54,814,000 in the same period of fiscal 2001. Sales in the
first 9 months of fiscal 2002 decreased 5.6% to $155,453,000 as compared to
$164,624,000 in the first 9 months of fiscal 2001. We believe that continued
weakness in the economy has affected our customers. Reportedly, business
travel and entertainment have been reduced by the recession, and individuals
have reduced their discretionary spending in restaurants which the Company
believes accounts for most of the decrease in sales volume in the
first three quarters of fiscal 2002 as compared to the same period of the
prior fiscal year.
Cost of goods sold decreased 10.3% to $16,512,000, or 32% of sales in the
quarter ended March 31, 2002 from $18,401,000 or 34% of sales in the same
quarter of fiscal 2001. Cost of goods sold decreased 11.4% to $50,761,000 or
33% of sales in the first three quarters of fiscal 2002 as compared to
$57,277,000 or 35% of sales in the same period of fiscal 2001. The average
cost of green coffee has continued to decline through the current fiscal year,
and at March 31, 2002 is approximately 22% below the March 31, 2001 cost.
Gross profit decreased 4.5% to $34,786,000 or 68% of sales for the fiscal
quarter just ended as compared to $36,413,000, or 66% of sales, in the same
period of fiscal 2001. Gross profit for the 2002 fiscal year to date
decreased 2.4% to $104,692,000 or 67% of sales as compared to $107,347,000 or
65% of sales in the same period of fiscal 2001.
Selling and General and Administrative Expenses (Operating Expenses) increased
1.7% to $24,943,000 or 49% of sales in the quarter ended March 31, 2002 as
compared to $24,531,000 or 45% of sales in the comparable quarter of the prior
fiscal year. Similarly, year to date Operating Expenses increased 3.4% to
$73,672,000 or 47% of sales in fiscal 2002 as compared to $71,243,000 or 43%
of sales in fiscal 2001. This increase is primarily the result of higher
pension costs ($1,000,000), ESOP expenses ($800,000) and employee medical
expenses ($700,000).
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.
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.
Other income decreased 84.7% in the three months ended March 31, 2002 to
$659,000 from $4,305,000 in the like period of the prior fiscal year. Other
income for the nine months ended March 31, 2002 decreased 35.6% to $8,164,000
as compared to $12,675,000 in the same period of the prior fiscal year. This
decline is primarily the result of reduced interest income ($1,664,000 for the
quarter and $3,453,000 year to date as compared to the results from similar
periods of the prior fiscal year) in addition to both realized and unrealized
losses on investments and interest rate futures and options ($1,990,000 for
the quarter and $1,297,000 year to date as compared to the results from
similar periods of the prior fiscal year). This is a consequence of lower
interest rates.
During the first nine months of fiscal 2002, the Company had realized and
unrealized gains (losses) on securities of approximately $(416,000) and
$(238,000), respectively, as compared to realized and unrealized gains
(losses) on securities of approximately $(1,559,000) and $1,475,000,
respectively, in the same period of fiscal 2001. Lower interest rates in the
current fiscal year have resulted in a lesser amount of interest earned.
Interest earned decreased 52% to $1,540,000 as compared to $3,204,000 in the
quarters ended March 31, 2002 and 2001, respectively, and decreased 37% to
$5,951,000 as compared to $9,404,000 for the first nine months of fiscal 2002
and 2001, respectively.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations," and in August 2001, the FASB issued SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets." The Company does not
believe that the implementation of these standards will have a significant
effect on the financial statements.
Quarterly Summary of Results
(In thousands of dollars)
3/31/01 6/30/01 9/30/01 12/31/01 3/31/02
Net sales $54,814 $50,807 $49,400 $54,755 $51,298
Gross profit 36,413 34,053 32,569 37,337 34,786
Income from operations 11,882 6,011 9,286 11,891 9,843
Net income 9,793 6,977 7,763 9,733 6,406
Net income per share $5.32 $3.78 $4.21 $5.27 $3.47
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 March 31, 2002 over 45% 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 ($2,130,000).
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 March 31, 2002. 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 March 31, 2002 Change in Market
Preferred Futures & Total Value of Total
Stock Options Portfolio Portfolio
- -200 basis points $55,948 $1 $55,949 $5,551
("b.p.")
- -100 b.p. 52,377 162 52,539 2,142
Unchanged 48,195 2,203 50,398 0
+100 b.p. 44,030 6,119 50,149 -249
+200 b.p. 40,176 9,495 49,671 -727
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 March 31, 2002. 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, 2002.
Commodity Risk Disclosure
(In thousands)
Market Value of
Coffee Cost Coffee March 31, 2002 Change in Market Value
Change Inventory Futures & Options Totals Derivatives Inventory
-10% $12,923 $581 $13,504 $716 ($1,436)
unchanged 14,359 (135) 14,224 - -
10% 15,795 (851) 14,944 (716) 1,436
At March 31, 2002 the derivatives consisted mainly of commodity futures and
commodity purchase agreements with maturities shorter than three months.
PART II OTHER INFORMATION
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, 2002 Farmer Bros. Co.
(Registrant)
/s/ John E. Simmons
John E. Simmons
Treasurer and
Chief Financial Officer