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, 1997 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, 1997. PAGE 1 OF 9 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, 1997 1996 Net sales $59,497 $52,785 Cost of goods sold 30,171 25,369 29,326 27,416 Selling expense 19,755 20,181 General and administrative 1,919 1,518 expenses 21,674 21,699 Income from operations 7,652 5,717 Other income: Dividend income 658 686 Interest income 1,842 1,444 Other 313 140 2,813 2,270 Income before taxes 10,465 7,987 Income taxes 4,237 3,328 Net income $ 6,228 $ 4,659 Net income per share $3.23 $2.42 Cash dividends declared per share $.60 $.60 The accompanying notes are an integral part of these financial statements. FARMER BROS. CO. CONSOLIDATED BALANCE SHEETS (Unaudited) September 30, June 30, 1997 1997 ASSETS Current assets: Cash and cash equivalents $ 23,615 $ 34,174 Short term investments 95,444 77,791 Accounts and notes receivable, net 18,465 18,401 Inventories 34,844 35,176 Income tax receivable 97 2,216 Deferred income taxes 1,804 1,804 Prepaid expenses and other 930 784 Total current assets 175,199 170,346 Property, plant and equipment, net 31,479 32,526 Notes receivable 2,977 2,977 Long term investments, net 56,756 51,341 Other assets 18,261 18,035 Deferred taxes 1 453 1,624 Total assets $286,125 $276,849 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 9,118 $ 7,510 Accrued payroll expenses 4,396 4,247 Other 6,557 4,623 Total current liabilities 20,071 16,380 Accrued postretirement benefits 14,703 14,347 Commitments and contingencies - - Shareholders' equity: Common stock, $1.00 par value, authorized 3,000,000 shares; issued and outstanding 1,926,414 shares 1,926 1,926 Additional paid-in capital 568 568 Retained earnings 247,980 242,907 Investment valuation allowance 877 721 Total shareholders' equity 251,351 246,122 Total liabilities and shareholders' equity $286,125 $276,849 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, 1997 1996 Cash flows from operating activities: Net Income $ 6,228 $ 4,659 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,347 1,430 Deferred income taxes (24) (15) Net (gain) on investments (167) (20) Changes in assets and liabilities: Accounts and notes receivable (74) 1,685 Inventories 332 1,629 Income tax receivable 2,119 971 Prepaid expenses and other assets (382) (453) Accounts payable 1,609 1,984 Accrued payroll expenses and other liabilities 2,083 2,743 Other long term liabilities 356 286 Total adjustments 7,199 10,240 Net cash provided by operating activities $ 13,427 $ 14,899 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, 1997 1996 Net cash provided by operating activities: $ 13,427 $ 14,899 Cash flows from investing activities: Purchases of property, plant and equipment (339) (1,308) Proceeds from sales of property, plant and equipment 72 35 Purchases of investments ( 83,646) (72,417) Proceeds from sales of investments 61,073 79,155 Notes repaid 10 9 Net cash (used in) provided by investing activities (22,830) 5,474 Cash flows from financing activities: Dividends paid (1,156) (1,156) Net cash used in financing activities (1,156) (1,156) Net (decrease) increase in cash and cash equivalents (10,559) 19,217 Cash and cash equivalents at beginning of period 34,174 28,165 Cash and cash equivalents at end of quarter $ 23,615 $ 47,382 Supplemental disclosure of cash flow information: Income tax payments $ 29 $ 579 The accompanying notes are an integral part of these financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) A. 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 generally accepted accounting principles for complete financial statements. It is Management's 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. B. Investments The Company hedges interest rate risk in its portfolio of preferred stock. Deferred losses associated with the hedge are $1,883,000 and $1,081,000 at September 30 and June 30, 1997, respectively. (In thousands) Gross Gross Unrealized Unrealized Fair September 30, 1997 Cost Loss Gain Value Current Assets Commercial Paper $32,636 - 136 $32,772 U.S. Government Obligations 62,782 (116) 6 $62,672 $95,418 (116) 142 $95,444 Non-Current Assets U.S. Government Obligations $13,130 (87) 21 $13,064 Other debt 1,695 (17) - 1,678 Preferred stocks 36,381 (22) 3,496 39,855 Liquid asset fund and other 2,471 (326) 14 2,159 $53,677 (452) $3,531 $56,756 (In thousands) Gross Gross Unrealized Unrealized Fair June 30, 1997 Cost Loss Gain Value Current Assets Commercial Paper $14,814 - 129 $14,943 U.S. Government Obligations 63,059 (211) - 62,848 $77,873 (211) 129 $77,791 Non-Current Assets U.S. Government Obligations $10,453 (169) - $10,284 Preferred stocks 36,816 (22) 2,574 39,368 Liquid asset fund and other 1,689 - - 1,689 $48,958 (191) 2,574 $51,341 B. Investments, CONTINUED The contractual maturities of debt securities classified as current and non- current available for sale are as follows: Fair Value Maturities 09/30/97 06/30/97 (In thousands) Within 1 year $ 95,444 $ 77,791 After 1 year through 5 years 14,742 10,284 $110,186 $ 88,075 Gross realized gain from available for sale securities were $255,000 and $405,000 at September 30, 1997 and 1996, respectively. C. Inventories (In thousands) Processed Unprocessed Total September 30, 1997 Coffee $ 3,704 $ 9,223 $12,927 Allied products 9,815 4,769 14,584 Coffee brewing equipment 2,185 5,148 7,333 $15,704 $19,140 $34,844 June 30, 1997 Coffee $ 3,564 $10,024 $13,588 Allied products 10,551 3,794 14,345 Coffee brewing equipment 2,310 4,933 7,243 $16,425 $18,751 $35,176 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Registrant's financial condition is substantially the same as at its most recent fiscal year end. The volatile market for green coffee always has an effect on operating results. The higher cost of green coffee has resulted in higher roast coffee prices, lower gross profit margins and lower sales volume. Net sales for the first quarter of fiscal 1998 increased 13% to $59,497,000 from $52,785,000 in the same quarter of fiscal 1997. Gross profit increased 5% during the first quarter of fiscal 1998 to $29,326,000 or 49% of sales, as compared to $27,416,000 or 52% of sales, in the same quarter of the prior fiscal year. Operating expenses, composed of selling and general and administrative expenses, reached $21,674,000 in the most recent quarter, compared to $21,699,000 in the same quarter of fiscal 1997. Other income increased 24% to $2,813,000 in the first quarter of fiscal 1997 as compared to $2,270,000 in the same quarter of the prior fiscal year, primarily the result of higher interest income. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations, (CONTINUED) Income before taxes increased 31% to $10,465,000 or 18% of sales, in the first quarter of the 1998 fiscal year as compared to $7,987,000 or 14% of sales in the same quarter of fiscal 1997. Net income for the first quarter of fiscal 1998 increased 34% to $6,228,000 or $3.23 per share, from $4,659,000 or $2.42 per share, recorded in the first quarter of fiscal 1997. Quarterly Summary of Results (In thousands of dollars) 09/30/96 12/31/96 03/31/97 06/30/97 09/30/97 Net sales 52,785 57,460 55,336 59,221 59,497 Gross profit 27,416 31,506 21,896 26,974 29,326 Operating income 5,717 8,633 (71) 2,510 7,652 Net income 4,659 6,834 1,595 3,602 6,228 (As a percentage of sales) 09/30/96 12/31/96 03/31/97 06/30/97 09/30/97 Net sales 100.00 100.00 100.00 100.00 100.00 Gross profit 51.94 54.83 39.57 45.55 49.29 Operating income 10.83 15.02 (.13) 4.24 12.86 Net income 8.82 11.89 2.88 6.08 10.47 (In dollars) 09/30/96 12/31/96 03/31/97 06/30/97 09/30/97 EPS 2.42 3.55 .83 1.86 3.23 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 none. security holders. 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 indentures. not applicable. PART II OTHER INFORMATION, (CONTINUED) (11) Statement re computation 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 Registrant filed a report reporting a change in accountant. April 14, 1997. 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 13, 1997 FARMER BROS. CO. (Registrant) John E. Simmons John E. Simmons Treasurer and Chief Financial Officer